Intuit Inc (INTU) — Q1 2020 Earnings Call Transcript

Thanks, Latif. Good afternoon and welcome to Intuit's first quarter fiscal 2020 conference call. I'm here with Intuit's CEO Sasan Goodarzi and Michelle Clatterbuck, our CFO. Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2019, and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in these remarks are presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior-year period, and the business metrics and associated growth rates refer to worldwide business metrics. A copy of our prepared remarks and supplemental financial information will be available on our website after the call ends. And with that, I'll turn the call over to Sasan.

Great. Thanks, Kim, and thanks to all of you for joining us today. We're off to a strong start through the first quarter of fiscal 2020 and continue to make progress on our strategy of becoming an A.I.-driven expert platform. First quarter revenue grew 15% overall, fueled by 15% growth in the Small Business and Self-Employed Group. Online Ecosystem revenue grew 35%, exceeding our target to grow 30% or more. Consumer Group revenue grew 11% and Strategic Partner Group revenue was in line with our expectations. This is a great start to the year. At Investor Day, I shared our top five priorities, which we call our big bets. These big bets focus on the largest problems our customers face and also represent durable growth opportunities for Intuit. I'd like to share our progress on each of these. Our first bet is to revolutionize speed to benefit for our customers when they use our products and services. We aim to deliver instant benefit and make the interactions with our offerings frictionless by accelerating the application of Artificial Intelligence. This big bet is foundational to everything that we do for our customers and positions us to accelerate execution across our other four bets. Here are a couple of examples of the progress we're making. First, we are on a path to triple the number of customers who can apply for working capital loans through QuickBooks Capital by extending eligibility to our desktop customers using machine learning. QuickBooks Capital leverages customers' data to provide loans to small businesses, nearly 60% of whom may not qualify for loans elsewhere. Second, we're enhancing our ability to answer customer questions more efficiently through TurboTax self-help. By leveraging A.I., we are delivering more relevant answers at the point of need and using natural language processing to expand personalized answers with TurboTax Assistant. In fiscal 2019, we handled millions of calls from customers needing help while using TurboTax. We expect this capability to improve customer satisfaction survey results and reduce customer contact rates by helping customers find answers to their questions more easily. Our second big bet is to connect people to experts. One of the largest problems our customers face is lack of confidence - to do their own taxes and to manage their business. We're connecting customers to experts on our platform to solve this problem, allowing us to gain share and grow average revenue per customer or ARPC. We are happy with the progress that we are making. We launched QuickBooks Live, connecting small businesses with live experts, opening up access to a new $10 billion market opportunity. This offering is intended to increase our small business customers' confidence, helping them get set up, close their books each month, and ensure their records are accurate and up to date. Over the last six months, we've run more than 50 tests to learn about what customers truly need, helping us develop the offering, and refine our go-to-market and pricing strategies. At the same time, we continue to build out the expert pipeline, as 90% of TurboTax Live experts expressed interest in working with QuickBooks Live. In TurboTax Live, we continue to innovate in making our experts more accessible at different touchpoints as we see a 32-point improvement in conversion for first-time filers when engaging with an expert. This season, we're launching real-time chat, an enhancement our customers have asked for since the inception of TurboTax Live. Our third big bet is to unlock smart money decisions for customers by connecting them to financial tools, partners, and benefits that help put more money in their pockets. Through our offerings, we are addressing key customer problems by helping them reduce high-cost debt, grow emergency funds, and improve their financial habits. Based on what we learned from the tests we ran during the extension season, we are optimistic about our ability to go beyond tax to help our customers make ends meet. For example, we introduced credit score goal setting and payment history tracking in Turbo to help customers improve their credit score. This is a key step to improving their overall financial health. Our fourth big bet is to become the center of small business growth, by helping our customers get paid fast, manage capital, and pay employees with confidence. We introduced new QuickBooks innovations at our flagship QuickBooks Connect conference earlier this month, to further support our customers' small business growth. For example, we announced a cash flow planner to help our small business customers make better decisions as they grow. We also announced receipt capture in the mobile app and enhanced mileage tracking to enable our customers to automatically deduct expenses seamlessly. All of these innovations put more money in our customers' pockets and should increase their success. Over time, we see the opportunity to better serve product-based businesses by transforming omni-channel commerce, benefiting customers who sell products through multiple channels. Our fifth big bet is to disrupt the mid-market with QuickBooks Online Advanced, our online offering designed to address the needs of small business customers with 10 to 100 employees. This offering will help us increase retention of these larger customers and attract new mid-market customers who are underserved by higher-priced competitive offerings. We continue to make progress building out the offering since launching last year. For example, we recently introduced a revenue streams dashboard that allows customers to easily compare revenue across products and services, projects, customers, employees, and other attributes to better understand their business performance. In summary, the entire company is focused on executing against these big bets to deliver for our customers and accelerate growth. Before I hand it to Michelle, I want to address the questions we've been getting on our free strategy. While the debate continues around whether the government should present a tax bill or taxpayers should prepare their own returns, our primary focus remains on meeting our customers' needs, helping them maximize their tax refund, and going beyond tax to help them make ends meet. Let me give you some additional context around free. Based on IRS estimates, nearly 104 million Americans are eligible to file for free through the IRS Free File program. However, that number doesn't tell the whole story. Recently, the IRS asked an independent organization to conduct a study of the Free File program. The study concluded that overall the Free File program was effective and that the majority of these 104 million taxpayers make a personal choice to use an alternative filing method for a variety of reasons. For example, many taxpayers, regardless of their income or complexity, prefer to have assistance as they lack the confidence to file on their own. As a result, the study concluded that the actual number of filers using DIY software and eligible to use Free File is roughly 30 million customers. Over 20 million taxpayers are already filing for free, either through Free File or commercial free offerings including many not eligible for Free File. And roughly 13 million of those Americans filing for free used TurboTax software and paid Intuit nothing. This is a testament to the quality of our free offerings – both the product we donate to the IRS Free File program and our commercial free offering. We offer millions of customers the option to file for free because we believe they will stick with us over time as their life changes and their tax situation becomes more complex in the future. Therefore, we remain very confident in our durable free strategy. To wrap up, we are very pleased with our results in the first quarter. And we remain focused on delivering against our objective in fiscal 2020. 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 2020, we delivered revenue of $1.2 billion, up 15% year-over-year. GAAP operating income of $10 million, versus a loss of $10 million a year ago. Non-GAAP operating income of $129 million, versus $102 million last year. GAAP diluted earnings per share of $0.22, versus $0.13 a year ago. And non-GAAP diluted earnings per share of $0.41, up from $0.29 last year. Turning to the Business Segment Results. In Small Business and Self-Employed, revenue grew 15% during the first quarter, fueled by Online Ecosystem revenue growth of 35%. Our strategic focus within Small Business and Self-Employed is to grow the core, connect the ecosystem, and expand globally. Starting with growing the core, QuickBooks online accounting revenue grew 41% in fiscal Q1, driven mainly by strong customer growth, and to a lesser extent higher effective prices and mix-shift. Second, we continue to make progress connecting the ecosystem. Online Services revenue - which includes payroll, payments, time tracking, and capital - grew 27% in fiscal Q1. Within QuickBooks online payroll, we continue to see revenue tailwinds from a mix-shift to our full-service offering which is priced 75% higher than self-service. Within QuickBooks Online payments, revenue growth reflects continued customer growth along with an increase in charge volume per customer. Third, our progress expanding globally added to the growth of Online Ecosystem revenue during fiscal Q1. Total international online revenue grew over 60%. I am also excited to share that in the U.K., we now hold the number one position for cloud accounting subscribers. We believe the best measure of the health and success of our strategy going forward is Online Ecosystem revenue growth, which we continue to expect to grow better than 30%. Desktop Ecosystem revenue was up 1% in the first quarter, in line with our expectations. Note that the first quarter is our largest desktop quarter of the year reflecting the annual launch of a new version of QuickBooks desktop software. Consumer Group revenue grew 11% in fiscal Q1. During the October tax extension season, we ran three times the number of tests we did two years ago. These tests will inform our tax offerings for the upcoming season. We're gearing up for our third season offering TurboTax Live. We're continuing to test new customer experiences as we work to provide our customers an even higher level of confidence this season. We are also seeing great engagement from experts, and over 90% of those we asked back plan to return this season. Our technology-first approach gives us confidence we can expand our Live offerings and maintain attractive Intuit operating margin longer-term. And in the Strategic Partner Group, professional tax revenue grew 6% in the first quarter, in line with our expectations. We've gotten a lot of questions about the macro environment and what we're seeing in our business. At this time, we're not seeing any evidence of a slowdown in our business related to the macro-economic environment. Charge volume trends remain strong, and the number of employees being paid in our ecosystem remains on trend. 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 an expected return on investment greater than 15%. We continue to focus on reallocating resources to top priorities at the company, with an emphasis on becoming an A.I.-driven expert platform. 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 road map. 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 $2.3 billion in cash and investments on our balance sheet. We repurchased $139 million of stock in the first quarter. We have approximately $2.5 billion remaining on our authorization, and we expect to be in the market each quarter. The Board approved a quarterly dividend of $0.53 per share, payable January 21, 2020. This represents a 13% increase versus last year. Turning to guidance, our Q2 fiscal 2020 guidance includes revenue growth of 11% to 13% percent, GAAP earnings per share of $0.70 to $0.73, and Non-GAAP earnings per share of $1.00 to $1.03. This earnings guidance reflects a shift of marketing investments for Consumer Group into our fiscal second quarter. We expect a GAAP tax rate of 21% for fiscal 2020. You can find our Q2 and fiscal 2020 guidance details in our press release and on our fact sheet. With that, I'll turn it back over to Sasan.

Great. Thanks Michelle. As I shared with you at Investor Day, 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. We remain focused on becoming an A.I.-driven expert platform, to solve our customers' most pressing problems. Now let's open it up for questions to hear what's on your mind.

Great. Thanks for taking my question. I'm not sure if this goes to Sasan or Michelle, but Michelle towards the end you mentioned that you guys are going to bring some marketing spend into Q2. Can you help us understand just based on your learnings from last year what kind of returns you guys are looking for? What are some of the areas, channel wise or other that you guys might be putting this money behind? And when we think about kind of that incremental spend, is it fair to assume that that's pretty much just all sales and marketing and not kind of other line items?

Hey. Thanks for your question. This is Sasan. First of all, it is all pretty much marketing and it's really focused on ensuring that we can raise awareness to transform the assisted category. As we've talked about before, last year was our first year in raising awareness in terms of you can do your taxes and we'll be there every step of the way for you, and we can help you. We're really doubling down on that this year and based on the behaviors that we learned last year, we felt that shifting more dollars to raise awareness early in the season and throughout the season will give us the opportunity to serve as many customers as we can. So that's really the primary driver for it.

Thank you very much. I would like to follow up on the second quarter guidance regarding the impact of the accelerated marketing spend specifically in the second quarter. What are your expectations for the start of the tax season? I don't believe the IRS has made an announcement yet. I'm interested in understanding what you anticipate and how it influences the second quarter guidance. Thank you.

First of all, you're absolutely right. It's all marketing based on what I just described earlier. And what we expect based on customer behavior and when the IRS opens is that just like we've seen in previous years, the moment the W-2's hit the door, those early filers are going to be ready to file and we're going to be there for them. I want to make sure that we raise awareness that they know we're ready for them and that they can have help if they need it. And then two, give them the ability to be able to file their taxes and get their refunds right away. And so we're really obsessively focused on our customers and making sure that they're ready to file the moment the IRS opens.

Thanks, Sasan. And any just not looking for much of a change in a year-over-year as far as the start of the tax season now just to the extent you can answer that.

Yes. Not really much of a change other than again what we've learned and what we're going to do differently from an execution perspective. We don't expect much of a behavior change and that's all of what has informed our guidance for the quarter, and we remain, of course, committed for the year.

All right. Thanks very much on that. And then I recently attended the QuickBooks Connect, it's a very dynamic event for sure. I was just curious if you could give us an update, Sasan, comparing and contrasting what you're seeing thus far with QuickBooks Live customers and/or staff, well not and/or and staffing relative to it when you initiated TurboTax Live? Thanks.

Well, first of all, thank you for attending QuickBooks Connect. I was truly blown away by just a number of innovations from our team, and they use QuickBooks Connect as the opportunity to launch many innovations across many fronts. And of course inspired by our customers and their passion. We actually use QuickBooks Connect as really an opportunity to activate QuickBooks Live. We had thousands of accountants and pros there and there was a great opportunity just to share the fact that we're solving a two-sided platform or a two-sided problem, I should say, and the opportunity they have to solve those very problems on our platform for our customers and generate more income. And I would tell you in the two sessions that we did it was standing room only with folks knocking on the door after they got their questions answered to figure out how to participate on joining the other platform. In terms of customer insights and learnings, we ran over 50 tests in the last six months both in terms of really getting the product market set thinking through, go-to-market and pricing strategies. And we feel that we're really positioned for something that's very early in its journey heading into busy season, helping customers get set up, providing help along the way when they need it. And in some cases doing it for them. So we're excited heading into busy season in January knowing that our primary focus is to learn. But so far both on the pro side and customer demand side, it's been exciting to watch.

Hi, Sasan, Michelle. Thanks for taking my question. Can you talk a little bit about the customer cohorts that are purchasing QuickBooks Advanced? Are they existing desktop ecosystem customers or are they new to the platform?

Yes. The primary focus that we have are our customers that have between 10 to 100 employees, but that's not a hard line. It really depends on the number of customers that they have, the number of invoices that they have to do, the number of accounts payable that they have and just the scale in which they operate. And so far, our primary focus has been ensuring that we take care of our existing customers. Those that are ready to upgrade to a platform that can better serve them and perform for them. While we build our capabilities to also acquire new. So we've seen about a 75%, 25% mix, 75% existing customers upgrading and 25% new. And over time, we expect that to evolve a bit because we want to actually accelerate the acquisition of new customers that we have. As we've shared before, there's about 180,000 customers within QBO base that are a fit for QBO Advanced. And so our primary initial focus in the coming kind of year and 18 months is our existing customers. But that's the mix we're seeing so far when new customers find out that we have the capability, they're just naturally coming over to the platform.

It's really helpful color. And switching gears to the consumer segment, with the pull forward of marketing spend are there any specific products you plan to lean into here? Is it going to be focused on TurboTax Live or some of the lower tier SKUs?

It's all the above. Our teams have worked really hard this year in context of enabling us to expand our lead in do-it-yourself category, enabling us to transform the assisted category and going beyond tax and finding ways to provide benefits beyond tax. And so really the focus areas have been self-employed, it's been Latinx, it's been improving our experiences for those that have that investment in stocks, while at the same time making sure help is available through TurboTax Live for all the cohorts. So really what we've learned in the last couple of years is all customers seek help from day one. And so we're ready to provide that both through if you want to do it yourself or through live. At the end of the tax experience, helping you understand that there's ways to save money. There are ways to connect to financial products that are right for you to get out of debt over time. So we're really ready on all those fronts from day one because what we've learned is customers have those needs from day one when tax season opens up.

Hi. Mark Randy here on for Keith Weiss. Thanks for taking my questions. So first maybe on QuickBooks Live. How much of the existing QBO base do you think will be interested in that? And kind of just how traction has been going and do you expect this to be a material contributor to revenue growth this year or maybe next year? Any color on that would be helpful.

Sure. First of all, it's important to remind that we're very early in our journey with QuickBooks Live. Literally, we just went GA and used QuickBooks Connect to activate it and we're excited about what more we can learn. So it's very early in the journey. There are a lot of similarities to TurboTax Live and the similarities are because of customer behaviors. The largest problem our customers face whether it's a consumer or a small business is confidence. It's confidence whether or not they're making good business decisions. Whether they need access to capital? Whether they're going to be able to make their payroll this coming week? How to think about profitability for their customer? So it's really a confidence problem and the confidence question that they have, which means that this will apply to a cohort and a portion of our existing base, plus it's really an opportunity to penetrate non-consumption. A lot of customers that sit on the sidelines and use Google sheets and Excel and just use a pro to help them run their business. This becomes the potential trigger for them to switch. And we're seeing all of that. We're seeing existing customers opt for help. And we're seeing new customers that are coming in opting for either getting set up or engaging for help along the way because they need advice. So thus far we're seeing it across the spectrum. We really have not accounted for this to be a material impact for our revenue in this coming year. Again, we are - this is we are early in the journey, but this is one of the company's five big bets and we believe that it's a huge customer problem and a big growth driver for the company in the future.

Great. Thanks so much. And maybe one more quick one. On the UK subscribers where you now hold the number one position. Can you talk a little bit about the driver of that growth? Is like the making taxes digital act still a big tailwind and how do you see that trending, I guess, for the rest of the year?

Yes. I am extremely proud of our team. Five years ago, we weren't even on the map in the UK and they set a goal to maniacally focus on customers getting to product market fit, and when we do, making sure that we really execute against our go-to-market strategies and raise awareness. And I would say, it's their hard work and focusing on product market fits. It's gotten us to the number one position because making taxes digital has been an opportunity for everyone. But our team has really done an incredible job nailing the product experience. Of course, we always have room to improve and really accelerating marketing investments and now our expectations are to really hold that number-one position to continue the growth.

Great. I believe this question is for Michelle to begin with. Considering the international growth commentary exceeding 60%, and looking back at some past metrics, particularly international subscriber growth in the high 50s, I recall there was a discussion at Analyst Day last year or earlier this year regarding the average revenue per customer in international markets being down. It seems like this indicates acceleration, although I realize I might be comparing different metrics. Could you provide some insight on this? How should we interpret the growth of over 60% in light of previous metrics and what does that trajectory look like?

Hi, Jenni. Yes. The total international online revenue growth for Q1 was 60% and obviously a lot of that was driven through the U.K. As Sasan just mentioned, with the move into first with online accounting subs in the U.K., that has been a driver of the revenue growth. We're very pleased with what we're seeing. We do believe that international longer term is a large opportunity for us. Right now the revenue from international is still a very small portion of our overall. But we are seeing the UK picking up steam there and we would expect that to continue.

Okay, great. I have one more question about QBO. You mentioned that subscriber growth is the main driver, but also that effective prices in QBO have increased. Can you provide more detail on what's contributing to this higher effective price and how sustainable that might be as we progress through the year? Is it simply a price increase, a mix of offerings, or how should we view this situation moving forward?

We are really pleased when we think about small business. We have the three pillars to the strategy of grow the core, connecting the ecosystem, and expanding globally. And we're pleased with the growth we saw in grow the core with online accounting in Q1 of 41%. Of the majority of that was driven by customer growth, the vast majority of that. Part of that to a lesser extent was our higher ARPC, the higher effective prices there. That is some price increase, but it's also lowered discounting. And then we also had the impact of some mix shift, the higher-priced products which is like QBO Advanced. That's really was driving that.

Hi. This is Yao Chu on for Brad Zelnick. Congrats on the quarter. Just I had a question on competition here. H&R Block seems to be coming out earlier this year on pricing in a very aggressive way especially on free online, where they continue to message the differentiation from TurboTax. Any initial comment on that in terms of pricing, especially in the free SKUs? And is this related to the pull forward in marketing spend in the next quarter in any way?

Thank you for your question. Our decisions and investments are focused on what we believe we can effectively execute to grow the category and increase our market share. This is not influenced by H&R Block's decisions. While I can't speak to their choices, I have a strong confidence in the decisions we've made and our focus as we move forward.

Great, thank you. And the second question here, just moving to the UK again, congrats on the number one position. Can you remind us of the offering there internationally, is payroll and payments available, has QBO Live or Advanced started to scale or if so, when would these be made available on an international basis?

In the UK, we currently offer our QBO platform and collaborate with app partners to address crucial challenges faced by our customers. The main issues regarding payroll and payments are managed through these partners. While we effectively tackle these significant problems, it’s all done via partnerships. Our goal is to eventually introduce QuickBooks Advanced and QuickBooks Live in the UK and other regions. There are important opportunities to address customer needs, which will drive our growth moving forward. We have been careful to ensure product-market fit in the US while preparing our globally ready platform to roll it out internationally, starting with the UK and then Canada.

Hi, Sasan. It's great to see the UK leading the way. Can you share your thoughts on other international markets that you're most excited about? Are there areas where you believe more significant improvements are needed, even if they might take longer to achieve? Also, are there other markets that you think could soon be in the UK's position? Thank you.

Certainly! First of all, I'd like to remind everyone that outside the US, we have established a presence in the UK, Canada, and Australia, where we have achieved product market fit. We're also targeting emerging markets, specifically France, Brazil, and India. We're very enthusiastic about the UK, but we feel that we are just beginning to tap into its potential, particularly in resolving customer issues that will foster revenue growth. Our primary focus has been on expanding our customer base and increasing market share, and now we aim to accelerate our growth to build a substantial business over time. To illustrate our position in the UK, I would emphasize that we are just starting to capitalize on the opportunities available. We find ourselves in a similar situation in Canada; growth is somewhat slower due to market dynamics, but there remain strong opportunities. Both the UK and Canada present pathways for future revenue growth. Regarding emerging markets, we are making progress, although not yet significant in terms of contribution; we are particularly optimistic about France and Brazil, where we are seeing positive momentum. While these markets have distinct characteristics, they offer long-term potential that we value. As for India, we are still working on achieving product market fit there and have not made the progress we desire. In summary, when I consider the opportunities in the UK, Canada, Australia, France, and Brazil, I feel confident about our prospects outside the US, and we are being very focused and intentional about our efforts in India to achieve product market fit.

Yes. Thank you very much for your questions and we look forward to chatting with you at our next earnings call. Have a great rest of the day and great rest of the week. Bye-bye.