Intuit Inc (INTU) — Q2 2022 Earnings Call Transcript

Thanks, Latif. Good afternoon, and welcome to Intuit's Second Quarter Fiscal 2022 Conference Call. I'm here with Intuit's CEO, Sasan Goodarzi; and Michelle Clatterbuck, our CFO. Unfortunately, Michelle has lost her voice, so I will be reading her prepared remarks today. Sasan and I will take your questions during Q&A. 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 2021, 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 statements. Some of the numbers in these prepared 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 this call ends. And with that, I'll turn the call over to Sasan.

Thank you, Kim, and thanks to all of you for joining us today. Second quarter results reflect continued strong momentum across the company as we execute on our strategy to be a global AI-driven expert platform, powering the prosperity of consumers and small businesses. We have a nearly $300 billion addressable market, driven by tailwinds that include a shift to virtual solutions and acceleration to online and omnichannel capabilities and digital money offerings. This, combined with the team's excellence in execution, is contributing to the strength of our performance. Second quarter revenue of $2.7 billion was driven by strong results from our Small Business and Self-Employed Group, Credit Karma and reflects an earlier start to the tax season compared to last year in the Consumer Group. Since tax season is now underway, let me start there. We are confident in our strategy of extending our lead in the do-it-yourself category and transforming the assisted segment. Based on our analysis, we are on track to gain share overall again this season. This, and other early indicators, gives us reason to be excited about our innovation and go-to-market decisions. Our focus this season is threefold. First, we continue to aggressively transform the assisted category by reshaping how 88 million filers get their maximum refund with confidence virtually. This opens up the $20 billion assisted tax prep category for Intuit. Second, we're serving the underpenetrated segments of LatinX, Self-Employed and investor segments, which are growing faster than the overall tax filing. And third, we're serving millions of members on the Credit Karma platform with personalized experiences. Our team has developed a strong game plan to win this season, and we are on track to achieve our full year Consumer Group guidance of 10% to 11% revenue growth. Our AI-driven expert platform strategy is accelerating innovation and our 5 Big Bets are solving the largest problems our customers face. We continue to deliver strong proof points that demonstrate the success and are well positioned for durable growth in the future. As a reminder, these Big Bets are: revolutionize speed to benefit, connect people to experts, unlock smart money decisions, be the center of small business growth, and disrupt the small business mid-market. Today, I'd like to highlight examples of our recent progress across 3 of these Big Bets. Our second Big Bet is to connect people to experts. We're solving one of the largest problems our customers face, lack of confidence, by connecting people to experts virtually with TurboTax Live and QuickBooks Live. With TurboTax Live, we're transforming the $20 billion assisted category by providing the 88 million filers who have previously relied on an in-person assistant the opportunity to access expert help or have an expert to file their taxes for them. We have improved the experience for customers by applying artificial intelligence to match them with an expert who is right for their specific situation and to deliver insights to experts so they can provide excellent service. These capabilities are also now available in the Credit Karma app for members that used an assisted method to file their taxes last year. We are off to a strong start in our busy season with QuickBooks Live. We're now giving customers earlier visibility as to how their business is performing, getting their books cleaned up faster and connecting them with an expert easier. We've seen some of our strongest weeks of new customer acquisition in January and retention rates in our target customer segment increased several points versus a year ago. We believe QuickBooks Live will enable us to reach small and mid-market businesses that have not used financial management software. And we are eager to continue accelerating our momentum for this offering. Our third Big Bet is to unlock smart money decisions. Credit Karma is a data platform with powerful network effects solving a two-sided problem. Our vision is to unlock smart money decisions by creating an autonomous financial platform that helps consumers find the right financial products, puts more money in their pockets, and connects them to insights and advice. In Credit Karma, we are innovating across all verticals. Our proprietary Lightbox technology allows us to better personalize and connect members to the products that are right for them, providing more certainty. Credit Karma's data platform and engagement model creates powerful network effects. We continue to see strength in credit cards and personal loans. Lightbox approximately doubles the average approval rate for members who apply for credit cards on Credit Karma versus outside of Credit Karma, making it a competitive differentiator for both our members and partners. We are solving a larger set of financial challenges for consumers in the auto and home verticals. And in auto insurance, we'll continue to strengthen the Karma Drive program. We launched new features and experiences this tax season designed to help the majority of Credit Karma members file easily with TurboTax and gain deeper insights into their finances. We're also offering tax filers early access to their refunds through direct deposit and refund advance program. First, Credit Karma launched a capability for members who previously filed with TurboTax to provide them with insights about their finances and taxes. Second, most Credit Karma members are able to file with TurboTax within the Credit Karma app and are eligible for special offers. And third, tax filers who choose to deposit their refund into a Credit Karma Money account will receive their refund up to 5 days early with direct deposit or get a portion of their refund in as little as 1 hour after the return is accepted through the TurboTax Refund Advance program. These TurboTax customers drive Credit Karma member growth and get access to personalized products across the platform, which accelerates engagement over time. Big picture, we continue to grow members by delivering personalized financial products, helping members save money, pay down debt, and get faster access to their money while providing insights and advice. Over time, we are creating a virtuous cycle, which we expect to increase the frequency of engagement, transactions, and monetization across our ecosystem. Our fourth Big Bet is to become the center of small business growth by helping our customers get customers, get paid fast, manage capital, pay employees with confidence, and grow in an omnichannel world. 60% of small businesses struggle with cash flow, and we continue to innovate to help customers overcome this challenge. In payments, we continue to improve discoverability, increase usage of features like Instant Deposit, and roll out new innovations like Get Paid Upfront to help qualified customers get paid soon after the invoice is set. All of this innovation is driving strength in our charge volume. In payroll, we continue to focus on making it easier for small businesses to pay their employees and provide them with expanded benefits. Nearly 40% of Americans say that they would struggle to pay an unexpected $400 emergency expense. We recently announced QuickBooks Early Pay, which will allow eligible employees to pay through QuickBooks Online payroll to access money between paydays. Getting and engaging customers remains a significant pain point for small and mid-market businesses. With Mailchimp, we are well on our way to becoming the source of truth for our customers to help them grow and run their business. We have 3 acceleration priorities with Mailchimp. First is to deliver on our vision of an end-to-end customer growth platform; second, disrupting the mid-market by developing a full marketing automation, CRM and e-commerce suite; and third, accelerating global growth with a holistic go-to-market approach. Since the acquisition closed in November, we've been moving with speed to deliver for our customers. We're aggressively building a seamless integration between QuickBooks and Mailchimp to create a growth platform, investing in marketing, and introducing the Intuit leadership playbook and operating system to execute at scale. Together, we are uniquely positioned to enable small and mid-market businesses to combine their customer data from Mailchimp and purchase data from QuickBooks to deliver actionable insights they need to grow and run their businesses with confidence. And this is where the real magic happens. Now shifting to the long term. We're also looking far ahead to anticipate our customers' future needs through our 6-year planning process, a part of Intuit's operating system, which we use to run the company. In December, our top leaders studied our customer problems and industry trends, the progress we've made since declaring our Big Bets 3 years ago and where we can have the largest impact in the future. This led to refreshing our 5 Big Bets to accelerate innovation, powering the prosperity of those that we serve. While our strategy remains durable and the essence of our big bets are the same, we have expanded the customer problems we want to solve and our vision for each Big Bet. For instance, as part of first Big Bet, revolutionize speed to benefit, we are accelerating investments in decentralized technologies such as blockchain and cryptocurrency, enabling us to help customers put more money in their pockets faster. As part of our second Big Bet, connecting people to experts, we're reframing how we think about virtual experiences by exploring metaverse technologies and expanding the segments we serve beyond tax and accounting to play a more meaningful role in our customers' lives. We'll unpack this evolution in more detail at our Investor Day in the fall. We remain focused on our role as a strong corporate citizen and the impact we are making on the communities where we live and work to further our mission. Intuit was recently recognized by JUST Capital on its JUST 100 top-performing companies list for 2022 for our progress on DEI, along with our focus on climate change, worker wellness, job creation, and customer privacy. Wrapping up, our strong business fundamentals, including our balance sheet, our speed of innovation, and demand for our platform, continue to put Intuit in a position of strength. Despite macro conditions such as rising inflation, supply chain issues, the Great Reshuffling, and geopolitical conflicts, our platform continues to thrive as digitization is more important now than ever, supporting our customers' needs to put more money in their pockets and helping them run and grow their businesses. We are proud to be the platform of choice for over 100 million customers around the world who rely on Intuit to prosper. Now let me turn it over to Kim.

Thanks, Sasan. For the second quarter of fiscal 2022, we delivered revenue of $2.7 billion, up 70%, including 31 points from the addition of Mailchimp and Credit Karma, GAAP operating income of $56 million versus an operating loss of $25 million last year, non-GAAP operating income of $612 million versus $235 million last year, GAAP diluted earnings per share of $0.35 versus $0.07 a year ago, and non-GAAP diluted earnings per share of $1.55 versus $0.68 last year. After the quarter ended, we entered into an agreement that will resolve the majority of pending arbitration claims related to the Free File litigation without admitting any wrongdoing. This resulted in an immaterial charge reflected in our fiscal Q2 GAAP and non-GAAP results. Turning to the business segments. In the Small Business and Self-Employed Group, revenue grew 47% during the quarter or 27% on an organic basis, excluding $240 million in revenue from Mailchimp. Online Ecosystem revenue grew 74% or 37% excluding Mailchimp. With the aim of being the source of truth for small businesses, our strategic focus within the Small Business and Self-Employed Group is threefold: grow the core, connect the ecosystem, and expand globally. First, we continue to focus on growing the core. QuickBooks Online accounting revenue grew 35% in fiscal Q2, driven mainly by higher effective prices, customer growth, and mix shift. Second, we continue to focus on connecting the ecosystem. Online services revenue, which includes Mailchimp, payroll, payments, capital, and time tracking grew 139% in fiscal Q2. Excluding Mailchimp, online services revenue grew 39%. Mailchimp revenue recorded in online services was $240 million in the quarter. This was in line with our expectations. Within payroll, we continue to see revenue tailwinds during the quarter from growth in payroll customers and a mix shift to our full-service offering. Within payments, revenue growth reflects an increase in charge volume per customer and ongoing customer growth. Third, we continue to make progress expanding globally. Total international Online Ecosystem revenue grew 226% in fiscal Q2 on a constant currency basis and 33% on an organic basis, excluding Mailchimp. We believe the best measure of the health and success of our strategy is Online Ecosystem revenue growth, which we expect to grow better than 30% organically over time. This is driven by 10% to 20% expected growth in both customers and ARPC. Desktop Ecosystem revenue grew 6% in the second quarter. QuickBooks Desktop Enterprise revenue grew low double digits, driven by strong customer growth and price increases. As a reminder, this fall, we transitioned to a subscription model for this year's desktop offering, which we expect to be a headwind to revenue growth in the second half of the year. Longer term, we expect the desktop business to decline. Consumer Group revenue of $411 million grew 180% in Q2, reflecting the earlier IRS opening this year. We are seeing a slower forming tax season taking into consideration both the earlier IRS open date this year and the latest IRS data. While still early in the season, our analysis shows we are on track to gain share overall, excluding users with the TurboTax free file offering in prior year periods. We remain confident in our plans and guidance of 10% to 11% revenue growth for fiscal 2022. We continue to focus on our strategy to extend our lead in DIY and transform the assisted segment with TurboTax Live. As a reminder, there are 4 key drivers of our Consumer Tax business. The first is the total number of returns filed with the IRS. The second is the percentage of those returns filed using do-it-yourself software. The third is our share, and the fourth is average revenue per return. Turning to the ProConnect Group. Revenue grew 14% in Q2, also reflecting the earlier IRS opening this year. Moving on to Credit Karma. Revenue was $444 million in Q2, another record revenue quarter, driven by high levels of monthly active users and revenue per monthly active user. Within the quarter, we saw another record quarter driven by the combined strength in personal loans and credit cards. The growth verticals reflected momentum year-over-year in auto loans and home loans. We are developing the emerging vertical by focusing on innovation with Credit Karma Money, which we believe is key to growing the frequency of visits over time. We remain excited about the opportunities ahead. Turning to our financial principles. We remain committed to growing organic revenue double digits and growing operating income dollars faster than revenue. As we shared before, as we lean into our platform strategy, we see the opportunity for margin expansion over time. 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 reallocate resources to top priorities with an emphasis on being an AI-driven expert platform. These principles guide our decisions and remain our long-term commitment. Our first priority for the cash we generate is investing in the business to drive customer and revenue growth. We consider acquisitions to accelerate our growth and fill out our product roadmap. We return excess cash that we can't invest profitably in the business to shareholders via both share repurchases and dividends. We finished the quarter with approximately $1.4 billion in cash and investments on our balance sheet. We repurchased $519 million of stock during the second quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter. The Board approved a quarterly dividend of $0.68 per share, payable on April 18, 2022. This represents a 15% increase versus last year. Now turning to guidance. We are reaffirming our fiscal 2022 guidance, including 26% to 28% revenue growth or 18% to 20% growth excluding Mailchimp. Our guidance for the third quarter of fiscal 2022 includes revenue growth of 32% to 33%, GAAP earnings per share of $6.18 to $6.24, and non-GAAP earnings per share of $7.51 to $7.57. You can find our full Q3 and fiscal 2022 guidance details in our press release and on our fact sheet. As you are aware, we completed the acquisition of Mailchimp, the largest transaction in Intuit's history during the second quarter. We are working to finalize the purchase price accounting process, which could result in a one-time impact to our second quarter GAAP-only results and full year fiscal 2022 GAAP-only guidance we issued today. This process will not result in a change to the total consideration of the transaction. We expect to complete this process before we file our 10-Q. And with that, I'll turn it back over to Sasan.

Great. Thank you, Kim. During our busiest season of the year, we are seeing continued momentum across the company given our strategy of being an AI-driven expert platform that is powering the prosperities for consumers and small businesses. I'm proud of what the team has accomplished this quarter, and I'm excited about the opportunities ahead to find new innovative ways to serve our more than 100 million customers. Now let's open it up to your questions.

I would like to start by asking Sasan what your perspective is. I know we don’t have much clarity from the IRS, but could you elaborate a bit on our earlier start to tax season? It seems to be beginning slowly, which is a bit unusual. Can you explain what might be causing that? I also have a follow-up question on this topic.

Yes. Sure, Scott. I would tell you, it's nothing unusual. Every year, I've been with the company for 17 years and ran the TurboTax business for 3 years, and every year, there seems to be a shift in consumer behavior shifting later and later in the year in the tax year. And primarily, it's because they know that they can. And especially now, I would say, with the fact that you can get access to an expert through our services versus relying on an in-person assistant and/or you can do it yourself, it's just consumer behavior shifting. I wouldn't read anything into it. It's not unusual. It is a trend that's been happening for years and it's continued this year.

Great. And obviously, that's what's behind the reinstatement of the guidance and the comfort in the full season. I guess just a double follow-up on this topic. I heard in Kim's remarks, Free File Alliance, it sounds like people who utilized TurboTax through Free File Alliance in the past may have stuck with you this year. If you could elaborate on that a little bit? And then also if you could touch upon last year, you saw a boon of premier customers from investments. Could you just speak to how that is trending this year?

Certainly. First, I want to emphasize Kim's main points. She mentioned that while it is early in the season, we are pleased to see that we are gaining market share. It's worth noting that the share we are taking does not include those who participated in the Free File program. We hope to see some of those users return, which would be positive. The takeaway is that our overall share of IRS returns is increasing, and we are satisfied with our progress. Regarding your question about investors, we have two main strategic focus areas. First, we aim to simplify the tax filing process for those who need help through TurboTax Live. Second, we are targeting three underrepresented groups: investors, the LatinX community, and self-employed individuals. We feel optimistic about the start of this season and the trends we are observing. With more individuals engaging in stock and cryptocurrency trades, we believe we are in a strong position. Our improved user experience and expertise in trading, especially in cryptocurrencies, enhance our offerings. We are also increasing our market awareness to ensure that those who have traded—whether in cryptocurrencies or otherwise—know that we have knowledgeable experts ready to assist them. We are excited about our progress and look forward to the rest of the season, particularly in the investor segment you inquired about.

I wanted to follow up on the Consumer Tax side. Based on what you know now, as you look at your targets for the year, has anything changed in terms of your assumptions on how you would achieve them in terms of how much of the growth would come from unit volume versus increased revenue per return?

Yes, thank you for your question. The short answer is no. Things are progressing as we anticipated, which involves focusing on the assisted segment along with the three underpenetrated segments I mentioned. So far, everything is unfolding as we expected, and there is no change in our assumptions based on what we're observing in our KPIs.

All right. Great. And then one quick follow-up on Credit Karma. I get this a lot from investors. Any sense that you can give investors as to what a rising interest rate environment might do to the business profile or business trends for Credit Karma, either positive or negative?

We don't perceive any impact from rising interest rates. Consumers consistently seek access to financial products such as credit cards, personal loans, mortgages, auto loans, and insurance, leading to ongoing demand regardless of interest rates. Financial institutions are also continuing to invest in a high-interest rate environment, particularly on our platform, due to higher conversion rates driven by Lightbox technology. This technology offers personalized financial products at competitive rates, contributing to sustained demand on our platform. Additionally, we currently hold less than 5% market share in products like personal loans and credit cards. As we continue to provide tailored experiences for consumers, we expect to see increased engagement with our platform, which will encourage more financial institutions to optimize their credit models using Lightbox technology for better conversion and ROI. In summary, despite the interest rate environment, demand remains strong, and financial institutions are experiencing improved trajectories on our platform compared to one or two years ago.

Sasan, I have some reservations about taxes, so I prefer to steer clear of them. I want to ask about the QuickBooks Online Ecosystem. I've observed the company's progress in improving its attach rates for payments and payroll products, which has been encouraging. It's great that you're now separating online services into its own business. Can you share your ambitions for payment and payroll attachment within your Small Business installed base? Where do you envision that heading? Particularly with QuickBooks Advanced, do you see the potential to tap into a different market segment, especially with Mailchimp involved? I'm curious about the potential growth in that area, as it may currently seem like a small segment, but could be significantly larger considering the volume of payments processed through your platform.

Yes. Sure, Kash. Great question. First of all, petrified or not, you're going to have to get your taxes done by April 15. That's a wonderful reason for us being in the tax business, slow-forming or not, taxes will get done by April 18. With that said, to answer your question, I'll start at the highest level and do maybe a couple of double clicks. One, one of the many reasons why we are so excited about the Small Business opportunities, it is a very, very large total addressable market. And our penetration in that total customer TAM is still well below 10% when you look at the number of customers we have and the addressable market in the countries that we are in. So one, penetration is low, which is a big fuel for current growth and our continued growth. The second is even within the customers that we have, our penetration of the services that they use, which are primarily manual, is even lower. So if you start at the top with low penetration, both customer TAM and then services TAM because it's primarily manual, it's not yet digital, if one paints the factual picture of how large the opportunity is. I think then secondly, you asked the question about our aspiration, and I mean this very intentionally. Our aspiration is that we want every customer on our platform to be able to use the services that we have, and we want 100% of the customers to use 100% of the services as long as it is relevant to them, which is why our quest has continued to make it drop-dead easy for customers to use our services. Which I think gets to the third point, and we are such a different company than even a year ago than 2 years ago, we truly have a very powerful network and ecosystem of services from managing your money in and money out, helping you get organized on accounting, to helping you with payments, both receiving and sending payments to not only payrolls but ultimately benefits that we offer employees to lending capabilities. And then ultimately, all the capabilities that we have and are integrating to be able to help you grow your business to put your business online, market your business, and all the CRM capabilities. So we truly now have a suite of services to fuel the success of small businesses. And the reason we're seeing the services growth is because small businesses are seeing that by being on our platform and digitizing everything, it actually not only helps them grow, but helps them manage their cash and put more money in their pocket, but it helps them understand the profitability of their customers. And then the last thing I would say is actually what you just raised, which is very well positioned versus even where we were a couple of years ago in that we are now going upmarket to serve mid-market with QuickBooks Advanced. With that comes a 4x higher ARPC because they use more of the services that we have. And with QuickBooks Live, although very, very early days, because you're in essence engaging with advice and an expert, we are seeing higher engagement in services than if you don't use those services. So when you take all of that into account, I think the headline is large total addressable market, low penetration. We've got the services that we need on our platform, and it's really about just delivering for our customers, and we have years of growth ahead of us. Thanks, Kash. And do your taxes by April 15.

Just wanted to ask about your comment about new customer acquisition trend. You talked about earlier the lagging effect from new business creation. So as you looked at new business creation trend, how should we think about new customer acquisition as a growth driver for QuickBooks? And also, as you're seeing the new cohort coming in, what kind of mix safety you're seeing for the higher ASP, like QuickBooks Advanced or other higher ASP products?

Thank you for your question. I want to start by emphasizing that we aim to grow our new customer base by 10% to 20%, as well as increase our average revenue per customer by the same percentage. This is key to achieving our goal of over 30% growth in online and ecosystem revenue. Acquiring new customers is crucial, and we have various strategies in place to support this, from targeting the lower end of the market with QuickBooks Checking to serving mid-market customers with QuickBooks Advanced. As I previously mentioned, we have a significant total addressable market with low penetration. My comments about new customers were in relation to QuickBooks Live. We are entering our third year with QuickBooks Live and have dedicated a lot of effort to understanding our customers’ needs and refining product market fit. In January, which marks the beginning of our busy season, we experienced some of our strongest weeks for customer acquisition, which is something we are proud of and has provided us with valuable insights for the coming months and next year. Regarding new business formation, the businesses that begin using our services tend to be more established, so while the creation of new businesses is beneficial for us in the long run, it doesn't have a significant immediate impact on our results. Our focus is more on established businesses.

Congratulations on a really nice quarter. And maybe expanding a little bit on Siti's question there. Obviously, there's some pretty extraordinary events going on all around us right now, whether it's what's going on in Europe, whether it's the inflation numbers that we've been dealing with, or in a Fed rate hiking cycle, which is difficult. It's a very volatile market environment. You guys have a great perspective on overall small business health. Can you give us an update kind of what you're seeing? Is any of this volatility starting to impact small businesses at all? And have you put any of that potential caution, if you will, because of this volatile environment into not raising your guidance because you guys had a really good Q2, particularly on the Small Business and Credit Karma side of the equation, but the full year guide doesn't really move?

Yes, thank you for your question. Let me break it down into two parts. Firstly, I want to remind everyone that within the total small business market we serve, which includes businesses with up to 100 employees, nearly 70% are service-oriented while around 30% focus on products. We've observed that the effects of COVID, along with inflation and supply chain challenges, primarily affect product-based businesses, leaving service-based businesses less impacted. As a result, we are witnessing a notable shift towards digitization, as small businesses recognize the efficiency and effectiveness of managing their operations through our platform. This environment, although challenging due to supply chain and geopolitical issues, has led to an increased interest in digital solutions among small businesses. It's important to note that most of our revenue comes from the U.S. Even though we aim to expand globally—with 30% of our QuickBooks business outside the U.S.—the macroeconomic factors from COVID-related impacts are already reflected in our international outlook. The key takeaway is that small businesses view this as a chance to digitize, indicating that we are at the start of a significant transformation. Regarding your second question about guidance, we are currently seeing robust performance in Small Business and Credit Karma, and we have not noticed the tapering we initially anticipated in Credit Karma. Strength is evident across all company segments, including tax, although this tax season is progressing more slowly than usual. As you know, we raised our guidance in the first quarter, which is uncommon for us. We plan to reassess our guidance once tax season concludes, but we continue to observe strong performance across all areas.

Got it. And on the Credit Karma, I did notice the strength in credit card, also the strength in Credit Karma margins. I know Michelle doesn't have a voice right now, but I know you could take it. Anything that we should be thinking about in terms of the second half of the year, why those margins wouldn't be sustainable?

Yes, Keith, I generally advise against focusing too much on the fluctuations in our margins by segment. We manage the company's margins at an overall level, not just for the sake of it. The investments we make across our platform to drive innovation require us to consider the entire company to ensure no segment is overlooked. Therefore, if margins appear high in one quarter, I wouldn't be overly enthusiastic, and if they are low, I wouldn’t question the decline. Our focus is on the company as a whole, and as you know, we have been expanding margins, which is reflected in our guidance. I am confident about our margin expansion, but I would not place too much emphasis on the segment level.

Sasan, that's remarkable. It's exactly the same answer Michelle would have given.

Well, that's why we're partners in crime.

Excellent. And I'll echo the congrats on a great quarter. Sasan, I listened carefully to your response to the first question to say that perhaps TurboTax Live was one factor that helped to get filers more comfortable, that they can be more relaxed and maybe file a little bit later. Is there anything that you see specifically in terms of live adoption that gives you optimism for what it can be as a percentage of the mix for the full season?

Yes, Brad, thank you for your question. I'll tell you, I'm starting to lose count, but I think this is our fourth year with TurboTax Live and as you know, this year, TurboTax is truly a platform. You can bounce back and forth between the platform from doing it yourself to getting access to an expert to help you in any which way you want to ultimately doing your taxes for you. And really where we've upped our game this year, which is a true differentiator to get folks to switch is the expertise of the experts. Because ultimately, what customers care about is if I'm a plumber or if I'm an investor or if I'm self-employed, if I worked in two, three states, I want to know that you understand my situation, which is why we've invested so much time not only in improving that matching by applying AI but also making sure that the collaboration experience is seamless because a lot of this advice can also be done through AI. That was a long way to answer your question. We are bullish about TurboTax Live. We are bullish about the 10 million customers that have churned within the assisted category. What we talked about at Investor Day last year, which is 17 million people that started TurboTax but never finished. And we like what we see, and we'll report out on where it all ended in our earnings in May. But it's playing a big role in what we would expect, both going after assisted, but also going after the underpenetrated segments, which actually look to assistance more than otherwise.

That's very helpful, Sasan. And maybe just a follow-up, either for you or for Kim. I think in your prepared remarks, and I think it was a Small Business comment, you talked about retention in target customers increasing several points. I just want to make sure I have that right. And if you can clarify it and unpack that first, that would be great.

Yes, for sure, Brad. Let me break it down into two parts. First, regarding last year, our overall retention rates in Small Business have indeed increased. In my opening remarks, I highlighted that we are seeing significant positive results in QuickBooks Live, particularly at the start of the season, where we’ve achieved record weeks in new customer acquisitions. Additionally, for the specific group of customers we are targeting, our retention in QuickBooks Live has risen. Both of these factors are crucial because we aim not only to acquire customers but also to provide the necessary services that encourage them to remain with us and return, which was the key point I mentioned.

I'll echo the congrats on a nice quarter. Sasan, can you just talk about some of the early learnings maybe from Mailchimp just in terms of go-to-market, what you've learned about sort of the cross-pollination of your clients? And also, how far out are we in terms of having a bit more harmonized back end between Mailchimp and QuickBooks? And what should we expect on that from a sort of technical integration perspective?

Yes, yes. Sure, Kirk. So let me just quickly touch on these 3 priorities that we have that we're maniacally focused on. One is to create this growth platform where really the magic is what we do behind the scenes with the data. It's combining the customer data, along with the purchase data to really help them understand where to target, where they can grow wallet share, what the profitability of their customers are, et cetera. And that's extremely powerful for our customers, not only to grow the services within our overall platform but also to acquire new customers because the reality is we will be the only platform that has this capability in one place. The second is to position ourselves together to pursue mid-market because this is even a bigger need as you could imagine, in mid-market. And then third, half of their business is outside of the U.S. And frankly, other than having a wonderful drop-dead easy platform, we haven't spent a lot of efforts internationally, and we are doubling down internationally. To answer your question on several months in, we're more excited about the capabilities of what is possible than we were even before and are even more intentional about the work that we need to do to bring these 3 priorities to life. If I were to paint a sort of general picture, I would say we'll probably be in a place in about a year where we're really seeing the impact of the momentum of these priorities as it relates to our outcomes and our results because we've inserted in Mailchimp some of our best product people that really understand QuickBooks, really understand this space that are building out the platform with, of course, the Mailchimp engineers, which are all part of Intuit. We think getting this right and we know how to get it right, we think in about a year or so, we'll start seeing the impact of the priorities that we are focused on. The good news is we know how to do it, and there are no surprises there.

Nice job to Kim stepping in there. We've seen it and enjoyed the ad campaigns of late. Is there anything you can add around engagements or early returns you're seeing on some of those programs? And maybe Sasan if you could expand on your view around striking the right balance between maintaining the powerful brand of each individual property, I think they're all fairly well known and established as separate entities versus presenting Intuit as a more holistic platform, that would be great.

Thank you for your question, Michael. I'll address the latter part first. It's important to highlight that we have strong brands that our customers appreciate and utilize, such as Mailchimp, TurboTax, Credit Karma, and QuickBooks. Our goal is to convey the connection between these brands to enhance customer benefits and support individual and business success. We want customers to understand that these powerful brands are here to stay, and our focus is on how we can help them see that everything is part of Intuit and why that matters to them. Regarding our campaigns, it's still early, but I'm specifically referring to TurboTax as I assume that was your main interest. We're quite satisfied with this year's campaign so far. Our message has been to convey that we have experts who understand various customer situations. Our advertising, both on television and digital platforms, addresses specific groups like the self-employed and those who have relocated across states. We've heavily invested in bringing the right talent onboard and enhancing our AI capabilities to effectively match experts with customer needs and provide them with valuable insights for better productivity. The response to our messaging has been very positive up to this point, and we will gather more information as the season progresses. We also conduct marketing mix modeling to evaluate effectiveness and identify areas for improvement moving forward. While we will gain clearer insights with more data, the initial qualitative feedback has been encouraging.

Fantastic. I wanted to just touch on Credit Karma as a channel for TurboTax. Last year, very effective in terms of driving new customer adoption. I kind of saw last year was the trial year and this year is the first real push. Just would love a sense of what you're seeing from a consumer engagement perspective in the first few weeks of tax season.

Yes, Ken, that's a great question. There are two main points to mention. First, we've made a significant effort to connect TurboTax users with Credit Karma, allowing them to deposit their refunds into a Credit Karma Money account, which provides them with early access. During tax season, managing money is crucial. This also helps convert these users into Credit Karma members, broadening their exposure to our platform. We are very pleased with our progress in this area. While I can't share specific statistics, I can say we're happy with the direction we're heading. The second point is that last year was more of a trial for integrating TurboTax with Credit Karma. This year marks the first real opportunity for users to complete their taxes directly within the Credit Karma app, which offers a much improved experience since many users won’t need to visit TurboTax separately. We're gaining valuable insights and making real-time adjustments based on this experience. Looking to the future, we're optimistic about engaging not just TurboTax users with Credit Karma, but also encouraging Credit Karma members who currently don’t file their taxes using TurboTax to consider it. So far, we are excited about our findings, the changes we are making, and remain very optimistic about the integration of these two platforms and the positive impact it has on our members and TurboTax users.

Sasan, maybe just one multipart one for me. I'm looking at the SMB online ecosystem number, and it looks like ex Mailchimp, growth there was about 4% sequentially. And I want to understand if you could unpack what's driving that? Because I'm trying to understand, was Q1 like unseasonably strong and Q2 is kind of back to normal? Or what's the right way to think about that, unpack maybe the drivers between payroll, payments, and capital and time tracking? And how do we think about that in the second half of the year growing sequentially because year-over-year, it's accelerating, and it's fantastic. But just looking back at history, understanding that a little bit better, I think it would be helpful.

Yes. Sure, Alex. Very good question. So first of all, I'll start with the obvious, which is overall, Small Business grew 24%. This is all excluding Mailchimp. And our Online Ecosystem revenue growth grew 37%. And as you know, our goal is to grow over 30%. So we actually had extremely strong quarters. So I'm not sure what the sequential number is that you were throwing out there, but we had a very, very strong quarter, well above our 30% mark. And it's based on strength in volume and the mix of customers that are coming in and particularly the services that they are using across payments, payroll, time tracking, and QuickBooks Capital. And as I mentioned earlier, we expect to continue to see strength in Small Business and Credit Karma in the second half of the year. We don't expect a tapering. And as I mentioned earlier, we just really want to get through tax season and talk about our guidance after the quarter. So I wouldn't read anything into the fact that Small Business is going to taper. I would say, focus on our compass, which is we want to grow north of 30% with our Online Ecosystem revenue and we actually are seeing great strength.

And then, Sasan, you mentioned Credit Karma a couple of times. You've gotten asked the question and kind of how you're seeing even more strength than you anticipated to some extent, no tapering, if you will. How is the progression of synergies going with Credit Karma within the Online Ecosystem business specifically? What are you seeing there? What learnings? And if you look at areas where you feel like there's an ability to double down and see even more growth, where would those be?

Yes, Alex. Strategically, our main focus has been integrating Credit Karma into the TurboTax experience and vice versa. For TurboTax customers, one of the first options available at the end is to deposit their refund into a Credit Karma Money account. This was part of our strategic plan, and it's performing very well. These customers often become new Credit Karma members, allowing us to showcase additional benefits on the Credit Karma platform. Additionally, we are working on enhancing the TurboTax experience within the Credit Karma app, providing contextual assistance to help customers with their taxes. It's still early in this process since we've only been at it for a year, but we're pleased with our progress and are committed to this area, as there are significant opportunities ahead, and we're already beginning to see positive signs. Another aspect is integrating Credit Karma into the payroll platform, which allows users to gain early access to their funds through a Credit Karma Money account. However, our primary focus remains on creating a unified consumer platform between TurboTax and Credit Karma.

Sasan, you've implemented some significant price increases for the full-service solution, ranging from 25% to 50% compared to last year's tax season. Could you share how these changes have been received and what factors influenced the decision to raise prices to that extent?

Yes, Brent. We have established pricing principles and conducted numerous tests, implementing various strategies in our lineup this year. To address an important aspect related to your question, we expanded our offerings for free customers to include student loans and refund transfers at no cost. This was a significant decision for us. Regarding our TurboTax Live platform, we have focused on attracting more customers from previous assisted services. For simple filers, we've made it possible for them to choose between filing themselves or through a live platform for a limited time without any cost. We're pleased with the progress and the positive effects we are observing. Additionally, we conducted many tests for TurboTax Live, particularly for full-service options, and found that price is not the primary concern for our customers. Instead, it's about having confidence and access to expertise. We realized that offering early and later season pricing didn't significantly influence customer behavior, so we've opted for a single flat pricing structure. We also found that we had the capacity to increase our prices based on extensive testing, leading to our decision to raise them. These strategic choices have proven effective, as data shows our customers are not overly sensitive to price; their main priority is access to the experts they trust to handle their taxes confidently.

I hesitate to ask this question, Sasan, but I know the Desktop is not your main focus. However, you continue to report numbers that are improving. Could you discuss some of the factors contributing to this growth in sustainability?

Sure. I want to mention two points. First, we have resilient customers who remain enthusiastic about their Desktop products and often surprise us by returning to desktop. This reflects our ongoing observations. Second, we are excited to see that most of our customers are transitioning to a subscription-based model, allowing them to take advantage of the various cloud services we offer. This shift is expected to enhance the subscription aspect of our business and provide customers with greater access to features and functionalities. We began rolling this out this year, and it will predominantly be subscription-based as we move forward.

If I could add two things to that, Raimo, just to remind you of some things that were mentioned in the script, the big growth driver in the quarter was Desktop Enterprise, which grew low double digits in the second quarter, up from high single digits in the first quarter. Similar to what Sasan mentioned, that growth specifically for Desktop Enterprise was due to customer growth and price increases. That's an important aspect to consider. We don't expect this business to decline long-term, especially with the headwinds from the subscription model transition in the second half of this year.

Sasan, I wanted to ask you a little bit about Credit Karma. Last year was just an amazing year in terms of the number of credit cards issued, and it seems like credit card issuers really battling for customers. I'm wondering, in your opinion, does that cause any comparison issue for you guys as you look at this year? And do you see that demand waning at all?

Yes, Kartik, thanks for your question. If you recall, probably a couple of quarters ago, Michelle and I both talked about the fact that we expect a tapering of originations in the second half of the year. We would expect to continue to see strength because of our execution and because of Lightbox and the fact that we really deliver personalized experiences, which is good for members and good for partners, but we expect a tapering of origination. And we haven't seen the type of tapering that we thought we would see, which is why we continue to see the strength that we're experiencing and what we would expect in the second half of the year.

Have you noticed anything surprising from competitors that would prompt you to consider making changes?

As a company, we engage in extensive scenario planning from the customer's perspective, focusing on understanding our customers and the various alternatives that could be more appealing to them. This approach is a key component of our strategy, and we excel at it within the tax sector. I want to emphasize that this year, we have encountered very few surprises. Therefore, there is nothing unexpected driving changes in our approach for the remainder of the season.

Sasan, obviously, it's a difficult hiring environment out there. Do you guys feel pretty good about where you are for the Live product to meet demand here in the next couple of weeks from a headcount perspective?

Yes. Thanks, Brad. The very short answer is absolutely. We actually, believe it or not, feel the best this year than we have in prior years just because we've gotten so good at what we need to do. We're several years into this, and many experts actually want to be on our platform. So we are absolutely fine on hiring.

All right. Excellent. Well, listen, everyone, thank you so much for all of your wonderful questions. Be safe out there. Take good care of yourselves, and we look forward to talking to you in May. Thank you, everybody.