Intuit Inc (INTU) — Q2 2020 Earnings Call Transcript

Thanks, Latif. Good afternoon and welcome to Intuit’s second quarter fiscal 2020 conference call. I am here with Intuit’s CEO, Sasan Goodarzi, and Michelle Clatterbuck, our CFO. We are also joined by Ken Lin, Founder and CEO of Credit Karma. 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 2019, and our other SEC filings. All of these documents are available on the Investor Relations page of Intuit’s website at intuit.com. We assume no obligation to update any forward-looking statements. Some of the numbers in these remarks are presented on a non-GAAP basis. We 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 the call ends. And with that, I will turn it call over to Sasan.

Great. Thanks, Kim and thanks to all of you for joining us. We posted strong results for the first half of fiscal year 2020. I am also excited to announce that we have reached an agreement to acquire Credit Karma, a pioneer in the financial technology sector, for approximately $7.1 billion. I could not be more enthusiastic about this transformational transaction and I am thrilled to welcome the talented Credit Karma team. Ken Lin, the Founder and CEO of Credit Karma is with us today to talk about our shared excitement and commitment to one simple goal, empowering consumers to make smart decisions about their money. We posted a slide deck on our website containing an overview of the agreement which provides more details. Let me start with a quick recap of the quarter. We are halfway through fiscal year 2020 and continue to see strong momentum across the company as we make progress on our strategy to become an AI-driven expert platform. Second quarter revenue grew 13% overall fueled by 17% growth in the Small Business and Self-Employed Group and 8% growth in the Consumer Group. Revenue for the Strategic Partner Group grew 8%. With this strong performance, we remain on track to deliver our full year revenue, operating income and EPS guidance. Let me remind you of the customer problems that we are addressing. All of our customers are consumers and 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 have 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. To solve our customers’ most pressing problems, we remain focused on becoming an AI-driven expert platform. We are working to achieve this strategy by pursuing five big bets. These include revolutionizing speed to benefit, so our customers fall in love with the product instantly; connecting people to experts to improve confidence; unlocking smart money decisions to put more money back in our customers’ pockets; becoming the center of small business growth by fueling our customers’ growth; and disrupting the small business mid-market with QuickBooks Online Advanced. Throughout the call, I will update you on where we stand on these bets. With that context, let me start with tax. We are confident in our strategy and are on track to deliver and achieve our full year guidance. As a reminder, there are four key drivers of our consumer tax business. The first is the total number of returns that are filed with the IRS. The second is the percentage of those returns filed using DIY software. The third is our share within the DIY software category. And the fourth is the average revenue per return. Based on the latest IRS data, the DIY software category is performing better than assisted as it has for more than a decade. As the category leader, we view it as our responsibility to help drive category awareness and growth. So we are pleased with this result. Through February 7, IRS data shows total e-filed returns are up 0.6%, with self-prepared e-files up 3.5% and assisted e-files down 3.7%. Based on what we are seeing, our share within the DIY category is up year-over-year. We are growing the category and growing our share, which is right where we want to be. Our strategy for the Consumer Group is to expand our lead in the DIY category, transform the assisted tax preparation category and disrupt consumer finance. This is all in service of helping our customers make ends meet and get the largest tax refund. Let me share a few examples of how we are delivering for our customers this season. Within the DIY category, which is $3 billion in TAM, we are delivering enhancements to our premier offering to better serve customers with investments. We are driving faster growth in under-penetrated segments, including Latinx and Self-Employed. We are also expanding free eligibility to include all enlisted active duty military and reservists and providing historical tax return access for all customers. In the assisted category, which is $20 billion in TAM, we continue to make progress with our second big bet to connect people to experts with TurboTax Live. We are working to further increase customer confidence on our platform by enhancing first time use. This season, we improved accessibility back to experts by offering customers the option to connect with an expert when they first sign into TurboTax Live to address top of mind questions. We also introduced real-time chat and a floating Live Help button to make it easier to connect with live help at all stages of the return process. We continue to accelerate the application of AI to create tools for experts to automate repetitive tasks, increase efficiency and drive an even better customer experience. Beyond tax, we continue to make progress disrupting consumer finance, which represents $29 billion in TAM. This aligns with our third big bet to unlock smart money decisions. Through our Turbo offering, we are addressing key customer problems like managing debt, saving money and improving financial health overall. We are building on last season’s success by expanding the financial marketplace. We are now live with pre-qualification partners offering both credit cards and personal loans to help customers save money and to provide partners with more qualified leads. Nearly 25% of our weekly active users have set a credit score, savings or debt-related goal in Turbo and we expect this to drive higher engagement over time. Acquiring Credit Karma expands our TAM from $29 billion to $57 billion accelerating our time to market moving beyond tax while also developing new ways to monetize our offerings. Now, turning to small business, we delivered another strong quarter in our Small Business and Self-Employed Group with Online Ecosystem revenue growth of 35%, exceeding our target to grow more than 30%. We continue to solve key customer pain points as we execute on our big bets. We remain encouraged with our early results with QuickBooks Live, part of our second big bet to connect people to experts, opening access to a $10 billion bookkeeping opportunity. QuickBooks Live solves one of the customers’ biggest needs confidence and peace of mind, while helping experts grow their business and find new customers. We are now also offering setup help, providing customers with confidence from the moment they subscribe. We are working to achieve our vision of being the center of small business growth, our fourth big bet, by helping our customers get paid faster, manage capital and pay employees with confidence. We introduced a new payroll lineup featuring full service across all offerings as well as TSheets integration for time tracking that’s resulting in customers adopting TSheets at three times the rate they did prior to launching the integrated offering and a tax penalty-free guarantee for select offerings. We also introduced a feature that double checks customers’ overtime calculations, reducing the likelihood of fines and penalties. We continue to make progress on our fifth big bet, disrupting the mid-market with QuickBooks Online Advanced, our online offering designed to address the needs of small business customers with 10 to 100 employees. We developed this offering to help us increase retention of larger customers and attract new mid-market customers who are over-served by higher-priced competitive offerings. Approximately 75% of our current QBO Advanced customers have traded up from our existing QBO product, unlocking benefits such as faster invoicing with batch import tools, automation, more customized fields and user permissions. Now, I want to address the news we announced today to acquire Credit Karma. I have long been an admirer of the company that Ken and his team have built. As we have gotten to know each other, Ken and I realized we both share one simple goal: empowering consumers to make smart decisions about their money. This combination fits directly with Intuit’s mission and long-term strategy. Our mission is to power prosperity around the world. And our bold goal for 2025 is to double the household savings rate for customers on our platform. This acquisition is a giant step forward in achieving that goal and significantly accelerates the execution of our big bet to unlock smart money decisions. This big bet is aimed at helping consumers address the personal finance problems they face today, helping them reduce debt, maximize savings and put more money in their pockets. Today, many consumers struggle with not knowing or fully understanding where they stand with their finances and they struggle to make ends meet. Household debt in the United States hit $14.1 trillion. 23 million consumers relied on at least one payday loan in 2018 to get faster access to cash. If consumers just had the tools to better understand their financial health and opportunities to improve it, they could unlock billions of dollars of potential savings. For example, understanding the difference and availability of lower-cost personal loans versus high-cost credit cards could save consumers $20 billion to 40 billion. And Credit Karma estimates that 80% of Americans overpay on car loans to the tune of $37 billion as there is no easy way to compare offerings. Consumers want to do better, and 60% say they are trying to improve their credit score, but they need help. We aspire to do more and Credit Karma is the perfect partner to help us do this. Credit Karma shares our goal of making it simple for consumers to make better decisions with their money through a platform that works like a personalized financial assistant, helping consumers find the right financial products, putting more money in their pockets and providing them with insights and advice. This platform will provide consumers with transparent access to their critical personal financial information, including their income, spending and credit history to help them better understand their complete financial picture and use it to their advantage, such as obtaining better interest rates. The result will be a complete financial profile that puts the power in consumers’ hands so they can take the steps necessary to improve their financial health. Let me tell you what this will look like. To find the right financial products, we will match consumers with pre-approved offers on personal loans, home loans, credit cards and insurance. We will put more money in their pockets by connecting them to higher yield savings accounts and faster access to their hard-earned paycheck. We will also provide insights and connect them to experts to help consumers make better decisions about their money and improve their credit score. All of this will be done by leveraging artificial intelligence and connecting consumers to over 100 financial partners on the platform, solving a two-sided problem. This consumer finance platform offers compelling value for our financial institution partners as we provide efficient access to a broad set of qualified customers. While consumers strive to be more informed about their finances and want personalized offers from a trusted source, financial institutions want high-quality leads and face real challenges matching their products to the right customers. We can help them target their offers based on metrics like verified income and credit history, giving them the ability to reach qualified prospects. Ken will get into this shortly, but Credit Karma’s history is remarkable. The Credit Karma platform has attracted more than 100 million members, with 88% engagement via mobile among active users and over one-third of which are active on the platform each month. The platform has a net promoter score of 69. The company recorded revenue of approximately $1 billion in calendar year 2019, growing 20% year-over-year. Impressively, over 90% of Credit Karma’s annual revenue results from existing members returning to the platform. Together, we can deliver unprecedented benefits to customers, combining the benefits of scale, trust and data. Let me turn it over to Ken, Credit Karma’s founder and CEO, to share his perspective on the transaction.

Thank you, Sasan. I’m very excited about today’s announcement. As Sasan mentioned, through numerous discussions, we have discovered a shared goal to improve personal finance for consumers. When we launched the company in 2007, we believed that consumers were being overlooked in financial services innovation. Our mission has always been to promote financial progress for everyone and create a level playing field for all consumers. In 2008, we introduced the Credit Karma platform, offering completely free credit scores to consumers. Now, 12 years later, we have delivered over four billion credit scores and built a platform with more than 100 million members, with over a third being active each month. It’s important to note that we are assisting a new generation in managing their finances, as more than half of our members are under 44 years old. We refer to our users as members because they possess verified information from a third party and engage with our products. When we started, we recognized that consumers were lost in a maze of complexity and we saw an opportunity for technology to make a difference. Today, we lead the market with a straightforward business model: we help consumers identify the right products for them based on their credit and financial profile, with their consent. Intuit enhances our ability to do this by allowing customers to include income data, enabling members to see more offers for which they qualify. We simplify the application process, significantly boost members’ chances of approval, and provide a transparent way for members to compare rates and features. We offer this for credit cards, personal loans, auto lending, mortgages, high yield savings accounts, auto insurance, home insurance, and other areas we plan to explore. This opportunity is also meaningful for all our trusted partners who have supported us throughout our journey. Our technology delivers personalized recommendations through 8 billion daily model predictions. What excites me most is the tangible impact we have on consumers' lives. For instance, we have observed significant increases in credit scores among members who actively engage with our platform over time. There are many reasons to collaborate with Intuit right now. Most importantly, we can work together to create technology solutions to address real consumer issues. We envision a platform that gives consumers transparent access to their vital personal financial information—including their income, spending, and credit history—to help them gain a comprehensive understanding of their financial situation and leverage it for advantages like securing better interest rates. Our insights will expedite Credit Karma’s mission and allow us to make a greater impact on our customers more swiftly than we could independently. With millions of customers, additional financial partners, and more resources, I believe we can build a more valuable business that helps us achieve our shared objectives. The culture and team that Sasan has developed played a key role in our decision to unite. We are inspired by Intuit’s mission to promote prosperity globally, and our team is eager to join Intuit on this journey. To my 1,300 Credit Karma colleagues, thank you. I am incredibly proud of the company we've built and the culture we've established. We have worked hard to reach this moment, but as I’ve emphasized, this is just one step in our journey together. Our mission to support our members’ financial progress remains unchanged. Now, as partners with Intuit, we will have the resources and capabilities to achieve our goals in a significant and impactful way. I’ll hand it back to you, Sasan.

Awesome. Thanks, Ken. I’d like to add that while we see a lot of innovation and investment in the marketplace, we don’t see anyone with our collective capabilities pursuing a personalized financial assistant. This is why we believe this combination can transform FinTech and power the economy. We have the ability to bring together consumers and financial institutions in innovative ways that lower costs for all those involved and level the playing field for consumers of all economic statuses. After the transaction closes, Ken will report to me, and continue to lead the Credit Karma team from its headquarters in San Francisco. Credit Karma will continue to operate under its current brand. Michelle will share the financial details of the transaction in a few minutes. To wrap up, we are pleased with the continued momentum of our Small Business and Self-Employed Group. We remain laser-focused on delivering for our customers during tax season, and I could not be more excited about the Credit Karma acquisition and the opportunity it provides us to power prosperity for our customers. Now, let me hand it over to Michelle.

Thanks, Sasan. Good afternoon, everyone. I will start by providing an overview of financial results in the quarter, and then share more details on the proposed acquisition of Credit Karma we announced today. For the second quarter of fiscal 2020, we delivered revenue of $1.7 billion, up 13% year-over-year, GAAP operating income of $270 million, a 16% increase, non-GAAP operating income of $384 million, a 13% increase, GAAP diluted earnings per share of $0.91, versus $0.72 a year ago, a 26% increase, and non-GAAP diluted earnings per share of $1.16, up from $1.00 last year, a 16% increase. Turning to the business segments, Consumer Group revenue was $499 million, up 8% for the second quarter. As we enter our third year of TurboTax Live, our technology-first approach continues to give us confidence we can expand our live offerings and maintain attractive Intuit operating margin longer term. As Sasan shared earlier, we are now using AI to automate repetitive tasks for experts on our platform, which we expect to increase efficiency and drive an even better customer experience. Based on data published by the IRS, the broader tax season got off to a slow start through January, when total e-filed returns were down 0.7%. We remain confident in our plans and guidance for the year. And in the Strategic Partner Group, professional tax revenue grew 8% in the second quarter, reflecting delivery of more forms during the second quarter as compared to the same period last year. In Small Business and Self-Employed, revenue grew 17% during the second 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 grow the core, QuickBooks Online accounting revenue grew 43% in fiscal Q2 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 23% in fiscal Q2. Within QuickBooks Online payroll, we continued to see revenue tailwinds from a mix shift to our full service offering. 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 Q2. Total international online revenue again grew over 60%. 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 second quarter, inline with our expectations, as QuickBooks Desktop Enterprise revenue grew at a double-digit pace in the quarter. Let me now spend a minute on the Credit Karma acquisition that Sasan and Ken described earlier. Intuit has agreed to pay total consideration of approximately $7.1 billion to acquire Credit Karma, comprised of half cash and half stock. The total consideration is subject to customary adjustments and includes an estimated $1 billion of equity awards that will be expensed over a period of up to three years. We will also deliver approximately $300 million of retention equity through restricted stock awarded to Credit Karma employees that will be expensed over four years. We plan to finance the cash portion of the transaction through cash and our existing unsecured line of credit. We expect the transaction to close in the second half of calendar year 2020, subject to regulatory approval and other customary closing conditions. We do not foresee an impact on maintaining our dividend and share repurchase principles due to the Credit Karma transaction. We expect the transaction to be neutral to accretive to Intuit’s non-GAAP earnings per share in the first full fiscal year after the transaction closes. We will provide updated Intuit guidance once the transaction is closed. Now, turning to our financial principles, we remain committed to growing organic revenue double digits and growing operating income dollars faster than revenue. Our financial principles in total have not changed and remain a durable framework for us. We finished the quarter with $2.3 billion in cash and investments on our balance sheet. We repurchased $139 million of stock in the second quarter. We have approximately $2.4 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 April 20th, 2020. This represents a 13% increase versus last year. Turning to guidance, our Q3 fiscal 2020 guidance includes revenue growth of 10% to 11%, GAAP earnings per share of $5.53 to $5.58, and non-GAAP earnings per share of $5.90 to $5.95. We expect a GAAP tax rate of 21% for fiscal 2020. You can find our Q3 and fiscal 2020 guidance details in our press release and on our fact sheet. And with that, I will turn it back over to Sasan.

Great. Thank you, Michelle. I would like to thank our employees, our customers, and partners for another strong quarter. I am excited about joining forces with Credit Karma and the transformative experience we can offer customers together. We will share more about our progress in the coming months. Now, let’s open it up for questions to hear what’s on your mind.

Excellent. Thank you so much and thanks for taking the question. Congrats on the deal today, certainly a company that we have been an admirer of for a long time as well. But Sasan, if I can ask, Intuit’s history includes some of the best acquisitions of all time in software and some deals that maybe were a bit less than great and with Credit Karma now the largest in the company’s history, I only have two questions, why is this the right time for Credit Karma and the push into consumer finance just given the heightened awareness on data privacy and where we are in the consumer credit cycle? And two, what’s the approach with this asset that will be different this time?

Thank you for your question, Brad. We greatly admire Credit Karma as well. Regarding why this is the right time, it aligns closely with our commitment to helping customers make ends meet, which is central to our strategy of creating an AI-driven expert platform. Since our audience consists of consumers, we are dedicated to enabling smart financial decisions. In collaboration with Credit Karma, we can provide significant benefits to consumers. Many consumers are facing substantial debt and often overpay on various fees, including credit cards, home loans, auto loans, and insurance. They lack access to advice on improving their credit scores and ratings, which are crucial for reducing interest payments and finding ways to save and grow their money. By partnering with Credit Karma, we combine our scale and capabilities—offering access to customer and financial data, which will allow customers to utilize their income, spending, and credit histories effectively. Together, we can help them access financial products that suit their needs, connect to savings accounts, and offer early access to paychecks, as well as provide insights and advice to improve their financial habits. This is why we believe now is the ideal time. In terms of acquisitions, our recent ones have been successful, and we consider them role models. We’ve learned from our history about what works. We focus on three critical aspects: our mission and purpose, alignment with Ken and his team, and ensuring that Ken is in charge. Our objective is to support his success and Credit Karma's success, and how we've organized our efforts is key to that success. We are confident in our approach and clear about managing risks.

Sasan, thank you so much for the very thoughtful answer. If I could just sneak in one for Ken, Ken, can you talk about the concept of autonomous finance and why being on Intuit’s platform can help to accelerate that vision? Thank you.

Yes, absolutely. So thanks for the question. So autonomous finance is really our ability to help consumers automate their financial life in a way that reduces friction, increases certainty, and creates more transparency and efficiency. If you look at the problems that exist today, most consumers don’t know which are the right products for them, they don’t know how to apply for those products, and there’s so much friction to making it happen. So for us, our platform is really predicated on integrating with financial institutions so that you can make it easy, moving the dollars or automating the process itself, so it does not require as much work and therefore friction. And lastly, adding a layer of education to consumers to understand what is absolutely best for them. If you do that, we fundamentally believe we can level the playing field for the most disadvantaged and most vulnerable consumers and assist them.

Yes, thanks very much and I’ll echo the congrats on the acquisition. Maybe starting there Sasan, I think it makes tons of sense in terms of the strategic vision and why you also want to leave Credit Karma on its own to continue its growth. However, on the back end of the businesses, there is obviously a lot of potential synergies in terms of the data you’re both collecting, the ability to apply AI to drive greater synergies for both. So how are you thinking about sort of the independence factor versus some of the maybe combined benefits of bringing the businesses together from a data perspective?