Intuit Inc (INTU) — Q3 2020 Earnings Call Transcript

Thanks, Latif. Good afternoon and welcome to Intuit’s third quarter fiscal 2020 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 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 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. And with that, I will turn the call over to Sasan.

Thanks, Kim, and thanks to all of you for joining us today. I'm going to cover four topics on today's call to help you understand our performance in the quarter, and our outlook longer term in the context of the global COVID-19 pandemic. I'll start by sharing how we've responded to the pandemic with our employees and customers, share our results for the quarter and highlight recent trends in our business. Then I'll put these results in the context of our long-term strategy and finish by talking about our playbook for leading in a downturn to accelerate our performance. Let's start with our response to the pandemic where unprecedented uncertainty, along with widespread shelter-in-place initiatives have changed our daily lives. At the onset of the pandemic, we created an enterprise crisis team to drive four work streams. First, keeping our employees safe and healthy. This has been and will continue to be our number one priority. Second, ensuring that we run the business effectively and continue to deliver for our customers. Third, keeping our workforce engaged and productive. And fourth, supporting our customers, our partners, and the communities where we live and operate. I'm proud of how our employees adapted to this sudden change and how seamlessly we transitioned our 10,000-person workforce around the world to a work-from-home environment. I'm even more proud of how in the face of uncertainty, our employees’ commitment to customers has grown even stronger. The challenges facing consumers and small businesses during this difficult time have inspired our teams to innovate with speed and apply platform capabilities to help to solve several problems caused by this pandemic. As a result, let me share three examples of how we're helping consumers and small businesses get access to aid and relief. First, in less than a week following the IRS announcement, we introduced three free stimulus registration tools in partnership with the IRS. These offerings helped more than 10 million Americans who were not required to file a tax return to easily register with the IRS to get their stimulus money. We're proud to donate our time and expertise to help the IRS quickly disburse billions of dollars in stimulus payments to Americans. Second, we launched Intuit Aid Assist to simplify the process of connecting small businesses to the right relief funding programs based on eligibility. Intuit Aid Assist uses artificial intelligence to distill the complexity of hundreds of pages of the CARES Act and convert it into an easy-to-understand user experience delivering a personalized and actionable recommendation. This new tool is based on the same knowledge engineering used by TurboTax to simplify the tax code. Third, as of May 20th, Intuit helped make available over $875 million in improved small business loans to customers from the Paycheck Protection Program or PPP to QuickBooks Capital. The team rapidly developed the solution to simplify and automate the PPP loan application process to help very small businesses access this program. We've helped approximately 25,000 small businesses access loans with an average loan of approximately $35,000, keeping up to approximately 150,000 employees on the payroll. These offerings are a testament to our unique platform and technology capabilities, and we will continue to find new, innovative ways to help our customers during this time of need. Now, turning to the fiscal third quarter results. Through the first part of the third quarter, we saw a continuation of the great momentum we built during the first half of the year, when revenue grew 14%. At the same time, the impact of the pandemic on taxpayers and small businesses is real. The extension of the IRS tax filing deadline and local shelter-in-place directives negatively impacted performance beginning in mid-March. As a result, our total revenue declined 8% in the quarter. Let me go into more detail with how the quarter played out, starting with our Consumer Group. The extension of the IRS tax filing deadline from April 15th to July 15th shifted the timing of millions of tax filings to later in the season, resulting in a 15% decline in Consumer Group revenue during the fiscal third quarter. Based on the latest IRS data, total returns are down 9.4%, reflecting the later July 15 tax filing deadline. The do-it-yourself software category is performing notably better than assisted and as the category leader, we're driving category awareness and growth. So we are encouraged by this result. Through May 8, IRS data shows total e-file returns are down 9.6% with self-prepared e-files up 2.2% and assisted e-files down 18.8%. Because this data includes stimulus filings for individuals not usually required to file a tax return, it is not comparable to prior year data. As of May 8th, our data also indicates a majority of expected April higher value customers with the most complex returns and those with balances due have yet to file. Therefore, we're proud of our progress so far and feel good about where we stand with the TurboTax online share and ARPC, keeping us on track during the last two months of the season. Our strategy is working. We're accelerating our innovation and are well-positioned for the remainder of the season. We're making progress on serving fast-growing under-penetrated segments including Latinx, self-employed and customers with investments. We are focused on increasing customer confidence through access to experts with TurboTax Live, and we're seeing a positive impact on both conversion and retention when these customers interact with an expert. The extension of the season has also given us the opportunity to run additional experiments to improve the experience, product lineup, and pricing for the future. Let me turn to small business. We began to see an impact from COVID-19 on our business in mid-March, as many small businesses began closing or significantly scaling back their operations, leading to loss of income and rising unemployment. Despite these headwinds, Small Business and Self-Employed Group revenue grew 11%, and Online Ecosystem revenue grew 28%. Let me share some of the recent trends in our business. During the second half of the quarter, QuickBooks online new customer acquisition decelerated approximately 15 points versus the first half, and retention within the existing customer base decreased by 2 points versus a year ago. We continue to expect the Small Business customer base and ARPC to grow in fiscal year 2020. The service offerings within QuickBooks Online have experienced an even greater impact. For example, after growing approximately 30% year-over-year through mid-March, payment charge volume was flat year-over-year during the second half of the quarter. Within our online payroll offering, after an increase of 20% year-over-year in workers paid through mid-March, workers paid decreased 10% year-over-year during the second half of the quarter. Similarly, after the total number of companies running payroll grew 15% year-over-year through mid-March, the number of companies running payroll was approximately flat during the second half of the quarter. These trends could result in higher attrition and lower revenue in the future. Despite limited visibility in the near term, we are more inspired than ever to achieve our 2025 prosperity, reputation, and growth goals. As a reminder, our prosperity goals are to double the household savings rate and improve the success rate of small businesses by 10 points better than benchmark for anyone on our platform. We will do so by becoming an AI-driven expert platform and doubling down on our five big bets. As we look into the future, we have resourced our big bets for acceleration. Let me share our progress on each of these bets. Big bet number one is foundational to accelerate innovation across our platform. I'll come back to this one in a minute since it supports the other four big bets. Big bet number two is all about connecting people to experts. One of the largest problems our customers face is lack of confidence to do their own taxes and to manage our business. We're connecting customers to experts on our platform to solve this problem with TurboTax Live and QuickBooks Live, allowing us to reach more customers, deepen engagement, and grow ARPC. Within TurboTax Live this season, we've improved access to experts through real-time chat and a floating live help button, contributing to improving customer conversion and retention. On the expert side of the platform, we're using AI to improve the experience by automating repetitive tasks and presenting experts with contextual customer information based on the location of the customer within the product experience. As a result, we've seen average session handle time decline nearly 20% this season, while at the same time providing a better experience for our customers. This season, we've earned the highest customer satisfaction scores for TurboTax Live ever. For QuickBooks Live, we're seeing promising early results. With the rapid shift to virtual solutions, we're seeing better-than-expected customer acquisition and we continue to experiment across the lineup. For example, we further refined the Set Up offering we introduced in January. We're seeing an encouraging number of customers who have used the Set Up offering to upgrade their monthly subscription, making us optimistic that it’s a great way to introduce customers to the benefits of QuickBooks Live. Our third big bet is to unlock smart money decisions for customers by connecting them to financial tools and partners that help put more money in their pockets. In its third season, we're on track to nearly double active use for Turbo. This suggests customers are finding value from our recently introduced innovations like mobile refund tracking and weekly credit score updates. In this challenging environment, our pending acquisition of Credit Karma is more important than ever because we help consumers make better financial decisions. Our fourth big bet is to become the center of small business growth by helping our customers sell in an omni-channel world, get paid fast, manage capital, and pay employees with confidence. We recently launched Cash Flow Planner in QuickBooks Online. Managing cash flow is the biggest problem our customers face, one that is only magnified during this difficult period. Cash Flow Planner is an AI-powered interactive tool that looks at small businesses’ financial history to predict future inflows and outflows, enabling a small business customer to forecast its cash needs more accurately. Within payments, we're offering our payments customers free access to instant deposits to put more money in their hands even faster. Since this free offer became available, the volume of payments received instantly by our customers has more than doubled. This offering is in its early days. Within payroll, we're enabling our small business customers to hold on to their money longer by using our money movement capabilities to pay employees the next day. As a result, we've reduced the time between running payroll and paying employees by one-third, driving product recommendation scores up 10%. Our fifth big bet is to disrupt the mid-market with QuickBooks Online, 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. We introduced several new features to help our customers individually tailor the product to their needs, including building their own dashboard and additional custom fields for expense transactions. We continue to work closely with partners to develop integrations that save our customers’ time and improve their experience. Now more than ever, a cloud offering is needed by mid-market customers at a disruptive price. Now let me wrap up our big bets by circling back to bet number one, which is our foundational bet to revolutionize speed to benefit for our customers. Our goal is to deliver benefits to our customers instantly and to make the interactions with our offerings frictionless by accelerating the application of AI. Earlier, I shared several examples of how we're using AI to provide customers access to help through Intuit Aid Assist and PPP funds through QuickBooks Capital or how our customers are accessing funds with instant deposit, managing cash flow with Cash Flow Planner or how we're improving the experience for experts with AI. We are uniquely positioned to use AI to unlock the power of data and service to our customers, both the velocity and impact of our innovation. Now, let me share our thoughts on the bigger picture in the current environment. We expect this environment to act as an accelerant to the best we've declared. First, we expect to see an accelerating shift to our virtual world. This aligns with our big bet to connect people to experts using technology to improve confidence. Second, the need for small businesses to increase their online presence and commerce will become more essential, and this aligns with our big bet to be the center of small business growth by providing tools and visibility for customers to better manage their cash flow. Finally, as we've seen in previous times of hardship, we expect consumers to put a high premium on offerings that can improve their financial health, which aligns with our bets to help consumers unlock smart money decisions. This includes helping our customers save more money and get out of debt and becoming a trusted financial assistant in their pocket with our pending acquisition of Credit Karma. Our strategy in big bets positions us better than ever before. We have a proven playbook that focuses our investments on accelerated innovation and what matters most. In that context, we have aligned the company to invest in what's most important for future growth while delivering against our financial principles. We intend to play offense during this downturn by investing in the largest opportunities for the future, our big bets. When we do our job well, we believe we will come out of this downturn stronger than ever before. To wrap up, I'm incredibly proud of our accomplishments this quarter. We remain focused on what matters most to our customers and those things that we can control during this time of uncertainty.

Thanks, Sasan. Good afternoon, everyone. I'll start by adding my thoughts on the playbook we're using to run the business during these challenging economic times and then provide an overview of our financial results this quarter. As Sasan shared, we've been through tough economic times before and have developed a playbook of principles for operating in a downturn. These principles are designed to accelerate our execution in the future and help both our customers and Intuit emerge from a downturn in a stronger position than when it began. One of those principles is focusing on controlling what we can, including discretionary spending to deliver bottom-line results; roughly three-quarters of Intuit’s expense base is variable over time. We're scrutinizing all expenses and carefully managing what we can control in this environment, such as travel, marketing spend, and hiring decisions. Let me now turn to our results. As Sasan mentioned, we saw a continuation of the strong momentum we built through the second quarter, during the first half of the third quarter, followed by a slowdown in our business beginning in mid-March. For the third quarter of fiscal 2020 we delivered revenue of $3 billion, down 8% year-over-year; GAAP operating income of $1.4 billion, a 21% decrease; non-GAAP operating income of $1.5 billion, an 18% decrease; GAAP diluted earnings per share of $4.11, a 21% decrease; and non-GAAP diluted earnings per share of $4.49, a 19% decrease. Turning to the business segments, Consumer Group revenue was $1.8 billion down 15% in the third quarter. This decline reflects the delay of the IRS tax filing deadline to July 15th which is shifting revenue out of the third quarter and into the fourth quarter. We're pleased with what we've seen season-to-date and do-it-yourself category continues to grow faster than assisted, and we feel good about where we stand with TurboTax Online’s share. With two months still to go in the season, it's difficult to know if these trends will continue or whether more consumers will choose to file an extension. Either way, we expect the DIY category to gain share again this season as it has for more than a decade. And in the Strategic Partner Group, professional tax revenues declined 18% in the third quarter reflecting the impact of the delayed tax filing deadlines on the timing of consumer tax filings completed by accountants. We grew Small Business and Self-Employed Group revenue 11% during the third quarter, driven by Online Ecosystem revenue growth of 28%. 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 36% in fiscal Q3, driven mainly by customer growth, higher effective prices, and to a lesser extent, mix shift. During the second half of the quarter, we saw the pace of new customer acquisition and retention both decline, especially among lower ARPC customers. Keep in mind that there is a lagging impact to QuickBooks Online accounting revenue, although we do expect both our subscriber base and ARPC to grow during fiscal year 2020. Second, we continue to focus on connecting the ecosystem. Online services revenue which includes payroll, payments, time tracking, and capital grew 16% in fiscal Q3. Within payroll we continued to see revenue tailwinds during the quarter from a mix shift to our full service offerings. Roughly two-thirds of online payroll revenue is generated from monthly subscription fees and one-third is generated from per employee monthly fees. Within payments, revenue growth reflects continued customer growth along with an increase in charge volume for customers. During the second half of the quarter, charge volume decelerated. Fewer workers were paid and fewer companies ran payroll. These leading indicators could result in higher attrition and lower revenue for these offerings in the future. Third, our progress expanding globally added to the growth of Online Ecosystem revenue during fiscal Q3. Total international online revenue, again, grew over 50% reflecting subscriber and ARPC growth earlier in the fiscal year. However, this momentum has slowed and could resolve in decelerating revenue growth in the future. Desktop Ecosystem revenue declined 6% in the third quarter. Desktop units declined sharply, reflecting lower sales through the retail and direct channels beginning in mid-March. This was offset by mid single-digit QuickBooks Desktop Enterprise revenue growth. Within our desktop payroll offering, nearly 10% fewer workers were paid during the second half of the quarter versus a year ago. This compares to growth in the mid single-digits during the first half of the quarter through mid-March. Desktop payments charge volume growth declined just over 20% in the second half of the quarter. As we shared, Intuit is helping small businesses obtain loans from the Paycheck Protection Program through QuickBooks Capital. We're working in partnership with an SBA approved bank and we're also directly funding a portion of these loans. We don't expect to hold these loans on our balance sheet and revenue from these loans was immaterial during the quarter. Let me turn to our pending acquisition of Credit Karma. We expect the acquisition to be accretive over time, but given the current environment, we don't have visibility into whether it will be neutral to accretive in the first full fiscal year after closing. We continue to expect the transaction to close during the second half of calendar year 2020, and we're excited about the unprecedented benefits we can deliver together for customers. 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 investments greater than 15%. We continue to focus on reallocating resources to top priorities as a company, with an emphasis on becoming an AI-driven expert platform. These principles remain our long-term commitment, although we recognize that we may not be able to achieve them in the current environment. 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 share repurchases and dividends. We finished the quarter with approximately $4 billion in cash and investments on our balance sheet. On May 7th, we drew down the full amount of our $1 billion revolving credit facility to maintain financial flexibility. We repurchased $40 million of stock in the third quarter, but have temporarily suspended share purchases in conjunction with the Credit Karma acquisition, as is typical during a stock transaction. We have approximately $2.4 billion remaining on our authorization and we expect to be in the market in the future. The Board approved a quarterly dividend of $0.53 per share payable July 20, 2020. This represents a 13% increase versus last year. We will not be providing guidance today. As a reminder, we withdrew our fiscal 2020 guidance earlier this month, reflecting uncertainty in current small business trends. With that, I'll turn it back over to Sasan.

Great. Thanks, Michelle. We are uniquely positioned to make a positive impact on the world during this time. I'm proud of the actions that we've taken as a company to support our customers when they need us most. We've acted with speed, enabled our employees to be safe and productive working from home, and continuing to innovate for our customers. We're using our capabilities to rapidly deploy solutions to help consumers and small businesses access the products and relief that they need during this difficult time. I'm confident we will emerge an even stronger company.

Sasan, maybe just to start with you. When you think about this environment and what you all have to do to help your client base out, is there anything you've done differently I guess in terms of either invoicing duration or obviously discounting? I guess just how do you think about sort of, in balance, really the short-term versus the long-term? Obviously, you mentioned that the shift towards virtual is clearly going to happen faster and I think nobody would argue with you about that. But can you just talk about sort of how you're talking or thinking about your pricing when it gets down to it and invoicing with your clients in this very difficult environment for a lot of them?

Let me take it in maybe two ways. One, maybe mid long-term and then the other is the here and now. First of all, we have a playbook for times like this and our playbook is really about focusing on customers, focusing on innovation, and putting our investment dollars in the areas that matter the most. But then, as you heard from Michelle, being very diligent in terms of our expense envelope. With that said, as we look at the long-term, we're actually quite excited about the current environment, not the health element of it, but the fact that it will accelerate folks moving to a virtual world, folks moving to having more online presence and commerce capabilities and then money has always been important. But we believe more than ever, ways to save money and get out of debt are going to be more important than ever before and our big bets are squarely focused on the things that matter the most. And we happen, by the way, to be going through our one and two-year planning process, which literally was happening in parallel with when the pandemic started. And it was at that time where we actually used the opportunity not only to be clear about a conservative investment envelope for our next fiscal year, but to really ensure that we can take the dollars that we have allocated and use them as an accelerant for our bets and we just finalized our one and three-year plan internally and have allocated our dollars to the big bets and the ones that matter most, and in fact, again, using it as an opportunity to accelerate. So, we actually feel good about the things that we can control and the things that we need to do for our customers to come out of this even stronger. With that said, and going to the very today here and now elements of your questions, part of our playbook is to ensure that we really bend over backwards and do what's right for customers in this kind of an environment and beyond the innovations that you heard that we kind of turned on a dime to deliver like instant deposit for free, PPP, the free stimulus offerings that we referenced, brought to the marketplace. There are elements of things that we're doing for our customers such as we've paused any price increases that we planned. We paused our full-service payroll migration, which has significant benefits for customers and those that migrate to it at rave, but we didn't want to have our customers think about payroll migration in a time like this. As we've communicated in the past, we have in essence launched in your lineup in QuickBooks, one element of it being QuickBooks Advanced, which allows us to serve mid-market customers. That comes with very clear lines of number of users, number of invoices that you can pay, the number of transactions. And for now, we've actually paused that important line, where you have to migrate to QuickBooks Advanced, all of which at the right time we will put back in place. But we're being very diligent to do what's right for customers, and we're getting a lot of great feedback from customers, inclusive of some of the discounting that we put in place to acquire new customers in these very uncertain times. So those are just some of the examples of the things that we're doing. We have a proven playbook where really the team is actually getting quite well against it.

And if I can ask just a really quick follow-up. I assume given what's going on has really no impact on your initial thought process around sort of the integration plan for Credit Karma. Is that correct?

It does not. We're actually more excited about what we can do with Credit Karma to accelerate helping customers save money and reduce debt. So, it has not changed our plans.

Hi. Mark Rende on for Keith Weiss here. Thanks for taking my questions. So, I want to dig in a little bit to the TurboTax side. So, obviously a big shift in revenues related to the filing extension. But have you guys seen any change in the mix of free files? Was that any reason for the kind of push of revenues? Any detail on the free filing would be helpful.

So, Mark, thanks for your question. First of all, I'll just remind us that when you look at the categories that we serve, the DIY category is about $3 billion in TAM. The assisted category is about $20 billion in TAM. And then the consumer finance space, which we're going to be able to accelerate serving with Credit Karma, is about $57 billion in TAM. In that context, very specifically to your question, this is actually the part of the season that is our strength. Really the revenue that shifted into the fourth quarter is because of the fact that the IRS deadline shifted, and these are actually the more high value customers, the more complex customers and the ones that have balance due, and it's actually our strength. This part of the season is our strength, because it's our customers with the highest retention over the years. And so, given where we are with the category growth and given that we're the champions of do-it-yourself category with the category growth and what we see with share and ARPC, we feel good about where we are and we're excited about playing our game in the last two months of the season which is our strength. And we've really not seen anything outside of what we would expect from an FSA perspective. So, really the revenue shift is entirely because of the shift in the deadline.

Excellent. Really helpful. If I could sneak in one quick follow up. So, there's obviously been a big uptake in share gains this season in DIY. How do you expect that? Do you expect it to normalize until the back half of the season as shelter-in-place kind of restrictions come off or do you see this being relatively durable throughout the rest of the season?

Yes, I'll make two comments. One is, I think this pandemic will drive structural and behavior changes across many industries, whether it's education, how you get mortgage loans, how you manage your business, how you do your taxes. And the great news is we're positioned well with our digital platform to serve customers with assistance to really take advantage of the opportunity. And there's just simply a tailwind of more and more folks wanting to be able to do their taxes themselves and if they need help to be able to get that assistance in the comfort of their home. We'll have to see how the season plays out. I don't want to second guess whether these current trends will continue or not. But what I would tell you is that the shift to a virtual world probably accelerated by five years across many, many different industries. And I think that will be the same thing that we'll see play out when it comes to doing your taxes and/or helping small businesses manage their books, which is where QuickBooks Live comes into play.

What I would say is that in the first couple of weeks in May, we have observed stabilization. Specifically, there has been stabilization in charge volume and the number of payroll companies paying their employees. We’ve also seen stability in the number of companies using TSheets for time tracking, as well as in the acquisition of new customers and customer retention. Furthermore, we have experienced a slight increase on the desktop front because we intentionally slowed down communication upgrades for our desktop customers. The timing of those upgrades coincided with the onset of the pandemic, but now that we've resumed communication, there has been a small uptick. It's important to note that these observations are based on several weeks of trends, and while we want to acknowledge the stabilization observed in the first two weeks, we clearly hope to see the economy recover and small businesses reopen to determine if this trend will continue.

Yes, sure, Robert. Thank you for your question. Let me make two points. One, when this pandemic hit beyond the fact that we were right in the middle of our two and one year of planning and it was a great opportunity for us to agree to a conservative investment envelope as we look ahead to really continue to build our muscle in terms of prioritization and resource allocation. We also then looked at that here and now and what changes we would make. And we did reduce discretionary funds in areas that we were very comfortable with. Of course, travel is a given, but hiring and marketing across the board. And specifically in TurboTax both customer success and marketing, we of course needed to kind of lead time, which the team has done. We have a playbook around this and extended between now and July 15th. And so, we've done that. But I would say overall the company's discretionary spend is down because we lowered it for the right reasons, but particularly in tax, we just simply extended it through the end of July. We expect, by the way, just sort of kind of black box that we'll need to spend up to $20 million in both customer success and marketing because of the extension of the tax season to ensure that we're there for our customers, but we've also reallocated dollars from other places in the company to make up for it.

And then can you talk to how the economics of the PPP work for Intuit? Just like what kind of cut of the fees you keep and that sort of thing?

Absolutely. We haven't talked specifically about the monetization. As Sasan talked about earlier, we did say that we've provided $875 million of PPP small business loans, and we're working with an SBA approved bank to fund these loans. We're funding some directly, but it's a small amount and we don't expect to hold those. We expect to earn about 3% to 4% including servicing on the loans themselves.

Hi everyone, it's Yao Chu on for Brad Zelnick. Thank you for taking my question, and thanks for what you're doing for small businesses out there. I have a question as it relates to Intuit Capital and potentially Credit Karma. From my understanding, the business models of these segments rely on the algorithms that are basically a combination of historical behavior and real-time data. One of the criticisms of FinTech is that every crisis is driven from the next and that some of these algorithms may be built in data from the last cycle that may not be so relevant in the current one. As we work our way through this, can you share some thoughts on a couple of things. Firstly, how well these businesses and algorithms are working? And does the value proposition remain intact for these data-centric plays? And where the main gaps or differences in behavior where you may have needed to intervene? And I guess based on that, do you think managing through this crisis inherently increases the value of these assets in the longer-term playing through both the downswing and the recovery?

Thank you for the question, Yao, and good to hear your voice, and hope all is well. Let me make a general comment, maybe two general comments and get more specific to your question. I think that first of all, as you know, us and Credit Karma are operating as two separate companies, but what I can tell you from the due diligence that we did, we were very impressed with their machine learning capabilities, their ability to do quality checks, to watch for bias, and adjust their models on a daily basis because they use over 2,600 data points per customer to run their models and so they are always adjusting. But let me, that's in context of the due diligence that we did, and I would just say the second macro point is this is one of the reasons why we believe that this environment is actually an accelerant for us to find ways to help customers put more money in their pockets, save money, and get out of debt because all of the machine learning capabilities that we have and Credit Karma has and that we have that in this current environment, done the right way, actually allows us to adjust our models to better serve customers. Now, let me get more specific I think to your question around QuickBooks Capital. This QuickBooks Capital and the machine learning capabilities and the platform is something that we've been working on for years, both cleaning up the data so we can use 26 billion data sources and the 360 information that we have from our customers and with their permission to be able to know what loans that they can take on, what capacity, the number of months, and how quickly we can adjust our dial. And one of the things that the team has done that's a wonderful progress is that we do checks for biases. Whether in this environment or in a different environment, we're always checking for biases so we can adjust the model. And the model's built in such a way where we can adjust it on a daily basis so we can learn very quickly, and what we see in this environment is that it's actually a great opportunity to accelerate our learning so that we can be much more pinpoint in terms of what we can do for customers and when we can do it for the customers. So I'm proud of our QuickBooks Capital team and what they've been able to actually accomplish, and we're learning and adjusting more daily. And by the way, those capabilities are not just for QuickBooks Capital. We use those same capabilities for Instant Deposit, same-day payments, we use those same capabilities for same-day payroll, and so these capabilities are truly platform capabilities that we can use across the company.

And let me sneak one more quick one in. What are the main constraints in distributing PPP funds faster at this point?

I'm sorry. Could you ask your question one more time?

Yes, I know you've distributed about $875 million in PPP funds to-date. Can you talk to the main constraints on the ability to distribute the funds faster to your base?

Yes, first of all, we truly admire what the team in Treasury and SBA has done to make these loans available and all of the checks they've had to do on privacy and security to be able to distribute these loans, so they truly deserve applause for the work that they've done. To get to your question, we actually have been able to move quite fast and quite rapidly because of the fact that we know our customers' data, whether it's QuickBooks and payroll customers or QuickBooks Desktop payroll customers, or Self-Employed that have actually filed their taxes with us and be able to very quickly help them apply for the loan. Really, the biggest inhibitor has been all of these that are applying for the loan and having to wait in line to be able to get the loans approved by the SBA. And so, really that's where the bottleneck is. And by the way, the SBA is actually moving quite fast. It's just the number of loans that's coming out of loan requests and how they have to process it and ensure that they reduce fraud. That's I think probably the most difficult part. But on our end, we've been able to move very, very rapidly and we don't really have too many obstacles in front of us.

Sasan, you talked about one of the bets being in selling in an omni-channel world. In fact, we're seeing small businesses trying to have their online presence or moving to a more e-commerce environment. So could you give us some color on how Intuit can help and how big an opportunity it is for Intuit for helping SMB move online?

Yes, thank you for your question. Again, great to hear your voice, and hope you're safe and sound. When you think about Intuit's base, we serve primarily service-based businesses, and one of the core drivers behind our bet number four, which is being the center of small business growth, and one element of it is really providing transformative experiences to make it easy for our customers to do commerce across multiple channels, is to be able to accelerate serving and penetrating product-based businesses. But it's interesting what this environment is causing, so now let me get to answer your question in two ways. One is even service-based businesses. They're actually, if you remember at Investor Day, we shared last year that we have 400 million-plus invoices that our customers send out, but about 12% are payment-enabled. We're actually seeing more and more service-based businesses that are actually looking to make all of their payments payment-enabled so they can get paid online faster and be able to get out of the paper world. And so this is having, this is going to over time have an impact on service-based businesses to get out of doing manual payroll and doing it online because they've seen with the Paycheck Protection Program if you can't prove your payroll data, you're not going to be first in line to get a loan. And so, it's going to impact more and more service-based businesses going online which is where our sweet spot is. The second element, though, is the question you asked which is omni-channel, and really the core problem that we want to solve based on well over a year of conversations with our customers is it's actually quite easy for our customers to get set up on different channels, whether it's Instagram, Facebook, Etsy, Amazon, that's not their biggest issue. Their biggest issue is they lose sight of which customer is coming from which channel, which customer is profitable, are they getting paid on time across the different channels, how that connects to their inventory, because clearly, you don't want to run out of inventory and fulfillment is critical. And so the problem that we want to solve is really if I put it in simple terms, having an app where you can actually see all the orders that came in through all the different channels in one place. You can ultimately over time see the profitability of your payments. It connects to the profitability of your customers. You can see how it connects to your inventory that automatically tells you that you're going to have to fulfill your inventory. We're in the very early stages of solving that problem, but we're very clear on what the problem is, and we believe this environment will not only over time help us penetrate service-based businesses but it will position us better for big bet four, to serve product-based businesses. So, that's the way we see it and that's the way we think about it.

Yes, thanks for that color. And if I could ask one question on tax. This is an unusual tax filing year, as now it's shifted to July 15 from April 15. So what percent of the people have usually filed taxes if you exclude the people who filed for the stimulus check, what percentage have now not yet filed and moved to maybe for this quarter? And also, what are the changes you're seeing in terms of TurboTax Live adoption so far?

Sure. Well, first of all, I'll start by affirming it is a very unusual season because I don't think we've been in a place where tax season has been extended. But in many ways, it's affording us new opportunities because our team is built for times like this and things like experimenting in ways that we otherwise wouldn't be able to. So our team is doing a wonderful job leveraging the current opportunity. If you think about last year, there were 155 million returns filed and I think there are about 110-ish million that have been filed already, and the actual specific numbers are on the IRS website, but nevertheless, that kind of gives you a feel for what's left to come. In terms of TurboTax Live, we focused this year on improving first-time use. We're really focused on providing more access to experts because when our customers engage an expert, our conversion and retention go up and we're really focused on improving the expert side of the platform, meaning that experts would contextually know where the customer is, and how to best serve them and help them very, very quickly. And so far, TurboTax Live is really delivering within the expectations that we have had for it, and we've got two months of the most complex filers that are still left to come, and so we're excited to serve as many customers as we can between now and then through TurboTax Live.

And thanks for all the good color on the first half/second-half splits. Maybe I'll steer this question toward Michelle. So, obviously lots of unknowns in kind of going forward, but as we think about your kind of ability to guide or I guess lack thereof, is this more a matter of kind of magnitude in terms of things could get worse, or just an issue of duration in terms of not understanding how long this might play out? Thank you.

Hi, Ken. Thank you for the question. As Sasan mentioned earlier, we are starting to see some trends in the business that are stabilizing. However, it's really too early, based on just two weeks of data, to make predictions about the future. This is the main reason for our current stance. I want to emphasize that the absence of guidance doesn't reflect a lack of confidence in our business or strategy. In fact, we are more confident than ever in our approach of becoming an AI-driven expert platform and in the five significant initiatives we've outlined. That said, confidence doesn't equate to certainty, and we are navigating a very uncertain environment, which is why we are not providing guidance right now. The uncertainty is the key factor here.

Great. Thanks for taking my question. I have another one about QuickBooks Capital. For the loans provided for the PPP, how many of those customers were new and had not previously used the QuickBooks Capital loan program? It would be interesting to see if you're expanding the opportunities for existing users to engage with QuickBooks Capital. Also, are there any insights from the regulatory side or go-to-market strategies that could help accelerate QuickBooks Capital? Thanks.

Yes, sure. Thanks for your question, and Kim and/or Michelle will keep me honest on this. Our goal was to serve as many small businesses as we could, and of course, we started with our existing base, and I believe that all of the current customers that we served are all existing QuickBooks customers. So I'll get confirmation if I got that wrong, but it's been primarily all existing customers. And I would tell you to the second part of your question, it's incredible the halo effect that we've gotten by all the things that I mentioned earlier, from very quickly partnering with the IRS to launch the stimulus offerings, to what we've done with the PPP program, to what we've done to fund and partner with Go Fund Me, which is a crowd-sourcing platform to help small businesses get access to money, which I think has been almost close to $40 million that small businesses have gotten access to. Just a number of things that we've done has gotten really a lot of attention for QuickBooks as a brand that can help customers. And I think this current environment and what we have to do very specifically around PPP just really made our machine learning models stronger, which allows us to make our services stronger which allows us to really over time, helps us better serve payments, payroll, and ultimately QuickBooks Capital customers.

Great. Thank you. And then on Turbo and Mint, I think you in your prepared remarks talked a bit about engagement. I'm just wondering if you can provide a little bit more color there. Does engagement mean clicks, or does it mean actually going through and purchasing a credit card or a loan through your partner? I'm just wondering if you could give some more color there. Thanks very much.

Sure, yes, absolutely. So what we have seen, more demand, less supply. And so on the demand side, that means that customers are really interested in their credit score, they're really interested in setting goals for their credit score, and learning from us how to improve their credit score by potentially making payments on time or checking on the status of their refund, and of course, more interested in getting access to whether it's personal loans, credit cards, those sorts of things. What we've seen an impact on is on the supply side because in this kind of an environment, although the digital platform is the highest return for financial institutions, we've seen some financial institutions pull back temporarily off of the Turbo and Mint platform. But it's also the first place qualitatively that they told us they want to come back to. They're just waiting for the current environment specifically unemployment to stabilize so that they can then come back on to the platform. So higher demand, less supply from a financial institution side, which means less monetization.

Thanks very much. Good afternoon, Sasan and Michelle. Thanks a lot. My first question is during fiscal 2009, the Global Financial Crisis, Small Business was relatively flattish. I think the revenue was down only 1%, and Sasan, I'd love to hear your thoughts, just high-level conceptually about just compare and contrast that time versus this time, what we're seeing and what could be a good case/bad case. Thanks.

Sure, sure. Well, what I would start with and to build on your point, in '08-'09 timeframe, what you in essence saw was that the total number of small businesses that went out of business upticked a couple of points. The number of businesses that started downticked a couple of points. So there was kind of a 3-4 point impact on the total number of small businesses. And the second thing I would say is things are in some ways very different than '08 and '09 on two dimensions. One is, '08 and '09 was actually a recession caused by the health of financial institutions. This is a pandemic that's health-driven where small businesses have been completely shut down. The economy was actually quite healthy, but now it's not because of the shutdown of small businesses, which has also caused a recession. So in some ways, they're very different, but in many ways, the impact that we're seeing is the same, which is customer acquisition has slowed down, retention has down-ticked a few points, charge volume has down-ticked from being up 30 to now flat post-mid-March COVID impact. And so that's the impact that we're seeing now, but our business is also very different. We have a larger portion of our Small Business in subscription-based and it's in the cloud whereas back then, it was primarily Desktop which sees a sharper decline but also a sharper rebound. So with all of that said, those are the two or three things that from a from/to perspective are different. I would reiterate what I mentioned earlier. We are not trying to second-guess the market or meaning how fast things will rebound or how long this impact will stay in place. So we're very focused on our controllables, which is accelerating our focus on our big bets, helping our customers in times like this just to ensure we're positioned to come out of this much, much stronger than when we even went into it.

Thanks. I appreciate that. And as a follow-up, over on the tax side, just curious what insight you have from the IRS thus far with regard to the stimulus filings? And I believe in your April 13 press release, you said you thought that would be for more than 10 million Americans, but not a very clear number. Do you have an idea what type of impact that number will be on the IRS volume results this year for tax filing? Thanks.

Sure. As I mentioned earlier, the numbers related to stimulus are included in the current filings, and we hope the IRS will eventually separate them to provide clarity for our investment community regarding actual tax returns versus stimulus returns. Approximately 80% of individuals are eligible for the stimulus money. It's important to note that there are 10 million people who typically don't need to file taxes but are also eligible, and they must engage with the stimulus process to access these funds. We believe that by the tax season, the IRS will clarify and communicate the differences between actual tax returns and stimulus filings. Ultimately, this does not alter our overall perspective on the business. The do-it-yourself category is experiencing growth, and we are noticing a significant and rapid shift in this area. We are confident about our position in terms of online share and average revenue per customer, and we are eager to close out the next couple of months, which is our strong season.

Great, thanks very much. Michelle, you had mentioned earlier about three-quarters of the expense base is variable and it's taking some actions and has been forced into some actions around travel and marketing and hiring. Can you give us a sense on what amount you're saving right now with those things?

Hi, Brad. Thanks for the question. What I would start with is I would say that we have principles around leading through a downturn and they have been proven out. One of the principles in our playbook, as I mentioned, is really around controlling what we can, discretionary spend, so that we can deliver our bottom-line results. We're looking at all of our expenses. Some of those that are easiest to control though are the travel, some marketing spend and the hiring decisions. I'm personally, along with everyone on Sasan's staff making sure that we're really thinking about what we can do in the short term. But we're also taking a look at things that may have a longer-term impact, things like our real estate decisions and working remotely. As Sasan also mentioned a little bit ago, we will have some increases in expenses. That's for the tax season, the extended season, about $20 million that's marketing and customer success, but we have been able to offset some of that with the discretionary spend. We haven't given a specific number, but we feel very good about the actions that we've been taking in order to get our spend in-line and set ourselves up for next year.

Thanks for the question, and congrats on all the great work you've done for your customers. Probably a higher level question for Sasan. You talked about this idea of virtual acceleration, and just given your purview and that you see how businesses and consumers are behaving, I'm just wondering if there are any areas where it seems like it could be notably strong on potentially the other side of this pandemic. So any color you can give there would be great.

Sure, sure. I'll start with what I think all of you see and then I'll make a specific to us, but as I talked a lot with my peers across many different industries, whether it's CEOs of companies or investors in many companies across many industries, whether it's from how you used to get your workouts in and training, if you went to a trainer and how that is shifting to a virtual world, Peloton being one example of that where it's accelerating to an education world where now you have to figure out how to get your education online to more and more people now shifting to be able to engage for medical help online, to getting your taxes done, to being able to manage your business and bookkeeping. So we believe that this pandemic will have a structural and behavioral impact in several areas. One is just you're going to first think about how to engage in a virtual world, not in a physical world. It doesn't mean we won't go back to a physical world, but I think this will have a fundamental behavioral impact over time. Two is to ensure that you're doing most of your stuff online, whether it's how you do payments, whether it's how you do payroll, whether it's how you conduct commerce – even if you're a service business. Moving some of your things to now be able to conduct it online is going to be important. And then more important than ever, how do you ensure that you can save money and reduce debt? So we believe that structurally and behaviorally those three areas are going to accelerate, and it's anybody's guess by how much. But literally, if you think about it overnight, these areas have shifted and I just think we've progressed five years in this area of moving to a virtual world the area of more being online, and the importance of money. And that's one of the things that excites our leadership team and the whole company around what is possible for us to accelerate to ensure that we can deliver for our customers given these shifts that we're seeing.