Intuit Inc (INTU) — Q3 2023 Earnings Call Transcript

Thanks, Abby. Good afternoon, and welcome to Intuit's third quarter fiscal 2023 conference call. I'm here with Intuit's CEO, Sasan Goodarzi; and Michelle Clatterbuck, our CFO. Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations. You can learn more about these risks in our press release we issued earlier this afternoon, our Form 10-K for fiscal 2022, 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 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.

Great. Thank you, Kim, and thanks to all of you for joining us today. Third quarter revenue grew 7%, lower than our expectations, reflecting a unique tax season, while we exceeded operating income and earnings per share guidance. We continue to see strong growth in the Small Business and Self-Employed Group, which grew 21% in the quarter. Our overall performance this year demonstrates the strength of our platform and portfolio, including our ability to maintain earnings power in uncertain times while investing in the most important areas to drive long-term durable growth. We are raising our total company fiscal year 2023 revenue, operating income, earnings per share guidance. I am very proud of our team, as we now expect revenue and operating income to grow double digits, and margins to expand even more than previously guided. Let's turn to tax. While this was a unique tax season, we are making good progress transforming the assisted segment with TurboTax Live. This year, we expect overall IRS returns to decline 2% through July 31, below our original expectations for total returns to grow 1%, which was more in-line with historical trends. We also expect the DIY category share of total IRS returns to decline nearly 0.75 points, also below our expectation. We believe the IRS and DIY category declines are driven by those who filed in order to receive pandemic-era stimulus and tax credits during the past several years but did not file taxes this season. As a reminder, every point of IRS return growth equals about 1 point of TurboTax revenue growth, and every point of DIY category share growth equals about 2.5 points of TurboTax revenue growth. The expected decline in total IRS returns and DIY category share equates to an approximate $200 million negative impact to revenue for TurboTax versus our original expectations. We expect our share of total IRS returns to be down approximately 80 basis points this fiscal year, primarily reflecting pandemic-era stimulus filers who did not file taxes this season. Each tax season has been unique since the pandemic began four years ago, although average annual trends over this period are far more in-line with longer-term trends. Over this four-year period, we expect total IRS returns to be up approximately 1%, the DIY category share of total returns to be up 0.75 points, and our share of total returns to be up approximately 20 basis points, and average revenue per return to be up 9 points. These trends exclude users of the TurboTax Free file offering in prior-year periods. Our strategy to transform the assisted category with TurboTax Live is working, given the growth we have experienced in an environment where IRS returns are declining. We expect TurboTax Live customers to grow 13% this year, with TurboTax Live revenue up 19%, and total average revenue per return to grow 12%. While TurboTax Live has driven strong growth over the last six tax seasons, we still have an immense opportunity to penetrate and transform the assisted tax segment at an accelerated rate. This remains our top priority as we prepare for next year. Turning to small business, while we are not immune to the macro environment, our platform is resilient. Total online payment volume growth moderated 5 points from Q2, growing 20%. Despite this, the shift to digitization and the power of our small business platform resonate with customers as they look to grow their business and improve cash flow. We continue to see strength in the areas that have the greatest impact, including growth of our online mid-market customers, contributing to strong subscription revenue and higher ARPC. In Q3, growth in both the number of companies running online payroll and the number of employees paid on our platform remained strong. Our small business platform, including QuickBooks and Mailchimp, remains critical to our customers' success. Let me now step back and talk about our company game plan to win. Four years ago, we declared our strategy to become the global AI-driven expert platform and five big bets as the primary areas of focus to drive durable growth. We invested heavily in our data and AI capabilities to deliver accelerated innovation. Today, we have over 100 million customers on our platform and use 400,000 customer and financial attributes per small business and 55,000 tax and financial attributes per consumer to power 58 billion machine learning predictions per day. The acquisitions of Credit Karma and Mailchimp each contributed a rich and additive data set, which helped to deliver a 360-degree view of our customers. The scale of our data is an important competitive advantage and building block for our existing and future innovation with AI. We are accelerating re-imagining our customer experiences with generative AI capabilities, which we believe will be a driver of our long-term growth. Our platform capabilities are key to continued acceleration across all five of our Big Bets. I would like to highlight some examples of recent progress across these Big Bets. As a reminder, our 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. Our first big bet is to revolutionize speed to benefit. This data and technology bet is foundational to everything we do. We began investing in generative AI two years ago to accelerate our ability to fuel the success of consumers and small businesses. We implemented generative AI in Mailchimp, powering the Email Content Generator, enabling customers to create faster email campaigns based on industry, marketing intent, and brand voice. We deployed large language models, which recognize, summarize, and generate text, in our virtual expert platform to automatically summarize calls, reduce call times by hundreds of thousands of hours per year and reduce work for experts while improving efficiency. Our strategic investment in data and AI over the last four years positions us to lead through this technological shift, and we look forward to sharing more in the coming months. With our third Big Bet, our vision is for Credit Karma to become a comprehensive, self-driving financial platform that propels our members forward wherever they are on their financial journey. We are focused on growing Credit Karma Money, increasing member confidence to access financial products with Karma Guarantee, building out a richer experience for prime members, and becoming the financial platform of choice for consumers with the seamless integration of Credit Karma and TurboTax. We are innovating across all verticals and continue to have confidence in our long-term revenue growth expectations of 20% to 25%, despite near-term headwinds. I'll share a few examples. This season, we further streamlined the TurboTax filing experience into the Credit Karma app, and the number of customers using the experience to file their taxes was over five times higher than last year. With Credit Karma Money, we are innovating to help members get faster access to cash and make financial progress. This year, we saw over 45% growth in the number of TurboTax Online customers who received a refund advance in a Credit Karma Money account. This integration allowed approved members to get money in their hands in as little as one minute after the IRS accepted their return, and drove increased debit card purchase activity, contributing to a more than 100% increase in Credit Karma Money revenue during the quarter. Members who use this offering show higher engagement on Credit Karma, which creates additional monetization opportunities over time. With the Mint team now part of Credit Karma, we are building a new experience for members with prime credit scores, where Credit Karma is underpenetrated today. During the quarter, we began rolling out Net Worth, which helps prime members better understand their wealth. Our fourth Big Bet is to become the center of small business growth by helping our customers get new customers, get paid fast, manage capital, and pay employees with confidence in an omnichannel world. In payroll, our U.S. QBO payroll customers grew double digits this quarter, and the mix of online customers choosing our high-end offerings increased by over 1 point, driving higher ARPC. And in payments, we continue to innovate to drive digitization, from creating an estimate, to invoicing a customer to getting paid. Today, easier discovery, auto-enabled payments, instant deposit, and Get Paid Upfront, are all helping drive adoption of our payments offering, leading to 20% total online payment volume growth this quarter. We are making significant progress digitizing B2B payments to accelerate and automate transactions between small businesses and ultimately improve their cash flow. We see a tremendous opportunity as 70% of B2B transactions are still completed with checks. Following our launch of the QuickBooks Business Network to millions of QBO customers in January, we are piloting our own native bill pay solution and launched the initial beta of this functionality in QuickBooks earlier this month. Turning to 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 three acceleration priorities with Mailchimp: first, delivering on our vision of an end-to-end customer growth platform; second, disrupting the mid-market by developing a full marketing automation, CRM, and eCommerce suite; and third, accelerating global growth with a holistic go-to-market approach. This quarter, we made great progress against these priorities. We're continuing to see better paid conversion, improving retention versus last quarter, and stronger paid customer growth. This, along with higher revenue per customer, drove a several point acceleration in revenue growth versus last quarter. Let me share some details around our progress: To help introduce new customers to Mailchimp and drive customer growth over time, we introduced free trials, similar to what we offer for QBO. In early testing, this is already driving higher paid conversion and a mix shift into our higher-end offerings. To drive stronger retention of mid-market customers, we continue to leverage our virtual expert platform to offer assisted onboarding, with the goal of guiding these customers to more advanced features and increasing awareness and usage. This quarter, we saw more than 7 point increase in high-value customers going through this onboarding process versus last quarter, which we expect to help drive stronger retention over time. To drive accelerated global growth and execute our refreshed international strategy, we're translating the product into multiple languages. Early results indicate this translation work is driving increased activations and ultimately can drive revenue growth. And our fifth Big Bet is to disrupt the small business mid-market, representing a TAM of 1.7 million customers, of which 700,000 are already in our franchise today. Online mid-market customer growth remains strong, and we are driving ARPC expansion as we serve these mid-market customers across our full ecosystem of services. Wrapping up, with our durable AI-driven expert platform strategy, we are innovating at high velocity, using the power of our platform, modern technology capabilities, data sets, and artificial intelligence to deliver new offerings at scale. This is helping us put more money in our customers' pockets, saving them time, and ensuring complete confidence in every financial decision they make. We are well positioned to power prosperity for the people and communities that we serve as we enter this next technological shift. Now, let me hand it over to Michelle.

Thanks, Sasan. For the third quarter of fiscal 2023, we delivered revenue of $6 billion; GAAP operating income of $2.8 billion versus $2.4 billion last year; non-GAAP operating income of $3.4 billion versus $2.9 billion last year; GAAP diluted earnings per share of $7.38 versus $6.28 a year ago; and non-GAAP diluted earnings per share of $8.92 versus $7.65 last year. Turning to the business segments. Consumer Group revenue of $3.3 billion grew 3% in Q3. There are four primary drivers of our Consumer business. This data reflects our expectations through July 31, 2023, versus the prior year through July 31, 2022. The first is the total number of returns filed with the IRS. We expect total returns to decline 2% this year. This is below our original expectations of up 1%, as overall industry growth continues to reflect the multi-year impact from the pandemic. The second is the percentage of those returns filed using do-it-yourself software. We expect the DIY category of total IRS returns to be down nearly 0.75 points by the end of the fiscal year, below our original expectations. The third is our share. We expect our share of total IRS returns to decline by approximately 80 basis points this fiscal year, primarily reflecting pandemic-era stimulus filers who did not file this season. As a result of these same industry dynamics, we expect our retention to decline this year. The fourth is average revenue per return, which we expect to increase 12% this year, as we expect TurboTax Live customers to grow 13%, with TurboTax Live revenue up 19%. Historically, each point of total IRS returns growth corresponds to approximately 1 point of revenue growth for the Consumer Group, and each point of DIY category share growth corresponds to approximately 2.5 points of revenue growth for the Consumer Group. Using these historical sensitivities, the expected decline in total IRS returns and DIY category share equates to an approximate $200 million negative impact to revenue for the Consumer Group versus our original expectations. As a result of this expected decline in IRS returns, we anticipate total customers to decline 5% this year. We expect TurboTax Online paying customers to decline 1% this year, and a total of over 11 million customers who pay us nothing, down from 13 million last year. We now expect full-year Consumer Group revenue growth of 5% to 6% versus our prior guidance of 9% to 10%, reflecting the expected declines in IRS returns and DIY category share I mentioned earlier. Looking back over the last four years, including our updated guidance for this fiscal year, we expect our revenue to have grown over 10% on average annually, in-line with our long-term expectations. We continue to anticipate Consumer Group revenue growth of 8% to 12% long-term. Turning to the ProTax Group, revenue declined 5% in Q3. For the full year, we now expect ProTax revenue growth of 2% to 3%. In the Small Business and Self-Employed Group, revenue grew 21% during the quarter, and online ecosystem revenue grew 23%. With the goal of being the source of truth for small businesses, our strategic focus within the Small Business and Self-Employed Group is three-fold: grow the core, connect the ecosystem, and expand globally. First, we continue to focus on growing the core. QuickBooks Online accounting revenue grew 25% in Q3, driven mainly by customer growth, higher effective prices, 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 21% in Q3. Mailchimp revenue growth in the quarter accelerated several points from low-teens growth last quarter. Growth was driven by higher effective prices and customer growth. Within payroll, revenue growth in the quarter reflects an increase in payroll customers and a mix-shift to higher-end offerings. Within payments, revenue growth reflects ongoing customer growth as more customers adopt our payments offerings to manage their cash flow and an increase in total payment volume per customer. Third, we continue to make progress expanding globally by executing our refreshed international strategy, which includes leading with Mailchimp. On a constant currency basis, total international online ecosystem revenue grew 12% in Q3. Desktop Ecosystem revenue grew 16% in the third quarter, and QuickBooks Desktop Enterprise revenue grew approximately 20%. We are just over half-way through a three-year transition to a subscription model for our desktop accounting solutions, making this revenue more predictable. We also raised our desktop prices for several products last September to price for value. Looking ahead, we expect continued strong desktop ecosystem revenue growth next quarter and as we complete the remaining part of the three-year transition. We will continue to build out our online ecosystem and help our desktop customers migrate seamlessly to our online offerings when they're ready. We continue to expect the online ecosystem to be our growth catalyst longer-term. As a result of the strong growth we are seeing in the Small Business and Self-Employed Group, we are raising our full year segment revenue growth guidance to 24% from 19% to 20%. Credit Karma delivered revenue of $410 million in Q3, down 12%. As a reminder, Credit Karma represented 14% of our total revenue in fiscal 2022. On a product basis, the decline was driven primarily by headwinds in personal loans, home loans, auto loans, and auto insurance, partially offset by growth in Credit Karma Money and credit cards. We are seeing more stability across our core verticals. In both credit cards and personal loans, we continued to see some partners tighten eligibility, while some expanded eligibility during the quarter. In personal loans, we continue to see partners facing funding constraints. We added more partners to the platform to help diversify our partner base. However, we continue to expect personal loan revenue to decline this year after very strong growth in fiscal 2022. We are updating our full year Credit Karma revenue growth guidance to a decline of 11% from a decline of 15% to 10%. Our financial principles guide our decisions, remain our long-term commitment, and are unchanged. We finished the quarter with approximately $4.3 billion in cash and investments and $6.6 billion in debt on our balance sheet. We repurchased $483 million of stock during the third 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 $0.78 per share, payable July 18, 2023. This represents a 15% increase versus last year. As I've shared consistently in the past, we have an operating system we use to run the company, and this includes a proven playbook for operating in both good and difficult economic times. Our first priority is to do the right thing for customers, giving them access to the tools and offerings they need most. We manage for the short and long term, and control discretionary spend to deliver strong results while investing in what is most important for future growth. The scale of our platform, along with our rich data, gives us the unique ability to see leading indicators that allow us to be forward-looking and adjust quickly. I am proud of the team for how effectively we have used our playbook to invest in the most important growth drivers to position Intuit for the future while maintaining earnings power this year, despite the macro impact we are experiencing. We will continue to accelerate our innovation, and our goal remains for Intuit to emerge from this period of macro uncertainty in a position of strength. Moving on to guidance, we are increasing our fiscal 2023 guidance. This includes: total company revenue growth of 12% to 13%, up from prior guidance of 10% to 12% growth; GAAP operating income growth of 19% to 20%, up from prior guidance of 9% to 13% growth; non-GAAP operating income growth of 21%, up from prior guidance of 17% to 19% growth; GAAP diluted earnings per share to grow 7% to 8%, up from prior guidance of a decline of approximately 5% to 1%; and non-GAAP diluted earnings per share growth of 20%, up from prior guidance of 15% to 17% growth. Our guidance for the fourth quarter of fiscal 2023 includes: revenue growth of 9% to 10%; GAAP loss per share of $0.34 to $0.29; and non-GAAP earnings per share of $1.43 to $1.48. We expect a significant increase in our cash tax payments related to fiscal 2023 as a result of the tax law changes that require capitalization of certain R&D costs. With the recent IRS disaster-area tax relief, we expect to pay approximately $700 million related to fiscal 2023 in Q1 of fiscal 2024. You can find our full fiscal 2023 and Q4 guidance details in our press release and on our fact sheet. And with that, I'll turn it back over to Sasan.

Excellent. Thank you, Michelle. I know you'll be with us for another couple of months, but since this is your last earnings call, I want to express my sincere appreciation for all that you have contributed to Intuit over the last 20 years. You have made me, my leadership team, and the entire company better, and I am forever grateful. Wrapping up, we feel confident in our AI-driven expert platform strategy and our five Big Bets, and in an uncertain macro environment, our mission is more critical than ever to our customers. Let's now open it up to your questions.

Great. Thank you so much for taking the question. And Michelle, congrats on a phenomenal run. We will miss you next quarter for sure on the earnings call. I've got one for Sasan and maybe let me sneak one in for Michelle, especially since it is her last call. Sasan, how should we think about your big bet in helping customers overcome their lack of confidence by connecting them to Live experts in a world where generative AI is advancing at breakneck speed? Because I think you spoke about how you're using generative AI to deliver the Live platform. But how is Intuit positioned in a world where LLMs may be able to deliver human-like guidance interaction? And maybe for you, Michelle, your Consumer segment operating margin was consistent with last year despite the pressure on the top-line for all the reasons that you've mentioned. Just curious how much visibility that you might have had into how tax would play out and if you scale back investment at all, perhaps even marketing dollars into the end of the season? Thanks so much.

Great. Brad, thank you so much for your question. And I heard that I fell off when I was reading the last part of the scripts. So if I have a bad connection, I will switch phones and hop back to make sure I answer your question. But let me start with the question that you asked. First of all, I would take us back to what we declared four years ago. As you know, I've been on the record for four-plus years ago to say that I believe, and we believe as a company, that artificial intelligence is going to ignite global growth. And I believe that it's the biggest thing next to what we've experienced over time with electricity and the Internet. It's that big and it's that critical of a platform of innovation, which is why data and AI have been core to our investments in the last four-plus years. And with that as context, it's why we've been investing, specifically, in machine learning, knowledge engineering, natural language processing, and several years ago, we really started accelerating our investments in generative AI. And if I take it back to your question around confidence, when we've talked about solving the biggest unsaid problem that customers have, which is around confidence, it is really about solving it by helping them feel confident in their decision. And it doesn't necessarily always mean people. And in fact, if you look at our interactions today across all of our platforms, a large number of our interactions are actually our machines that are solving the customers' large problems. The reason we are so excited about AI from four-plus years ago is that you couple our data, which is a 360-degree view of the customer, it's actually where Credit Karma and Mailchimp have played such an important role to add to our rich data sets, you couple that with the investments in AI and now with generative AI, we can actually accelerate penetrating non-consumption. And this is across every customer that we serve, whether it's consumers, across Credit Karma, whether it's tax, whether it's small business, we have an incredible opportunity to accelerate, making things easier, more digestible, and more confidence-inspiring for our customers. And in fact, it's generative AI that gives us the ability to do things that we could never imagine possible because of the data that we have. So for us, we saw this as an accelerant several years ago. It's why we accelerated our investments and it's why we're so excited about the future, because the large language models, coupled with AI, coupled with machine learning and the investments that we've made, we believe that we can actually accelerate our innovation as we look ahead. And hopefully, I was loud and clear.

Yes, that was good. And Brad, first of all, thank you for the kind words. Your question around our ability to maintain earnings power within CG, really it's a focus for us as the whole company and it started last year when we were going through our three- and one-year planning process. We assumed that there would be economic uncertainty this year. And so as we were going through the process, we made sure that we had funded those things that were most important to delivering for customers and being able to drive our revenue growth. And then we were made list of the levers that we had that we could pull as we went throughout the year to be able to maintain our earnings power. And those are some of the discretionary things we had, which were whether it's travel or advertising or moderating hiring. And so our lower tax units also this year did result in lower expenses for that segment, specifically in customer success. But really, it's about us looking at maintaining not CG margins, but really at the company level and it started last year in planning.

Thank you very much. Goodbye to you, Michelle. We'll miss you. I have a question for Sasan and the team. Sasan, to return to the targets of 8% to 12% in the long term for Consumer, you'll need to reaccelerate the tax business. So, going back to the basics, how do you plan to grow the category? How do you intend to increase your market share in that category? That would be great. Additionally, regarding generative AI, does this create more opportunities while also potentially inviting new competitors? There is a thesis that suggests it might simplify the tax filing process, as Brad mentioned earlier. So, does it broaden the opportunity landscape while also drawing in new competition? How should we consider how this balances out for you? Thank you.

Thank you for the question, Kash. To address your inquiry about reaccelerating revenue growth, I want to highlight the $200 million impact we've seen this year due to a decrease in returns. Upon reviewing our analysis, it appears that the pandemic-era filers who accessed their stimulus and tax credits have now left the category. We believe this will lead us back to a more normal environment, which was a significant factor in our performance falling short of expectations this year. Regarding your question about reacceleration, I am optimistic about our TurboTax Live business, which has grown to over $1 billion and is seeing a 19% growth rate. I anticipate that in the coming years, it will become the largest segment of TurboTax. We are targeting a $30 billion total addressable market consisting of consumers using assisted tax services and businesses seeking assistance with their business taxes. Based on our learnings from this year's full-service offering, we believe we have a substantial opportunity to accelerate our penetration in that market. I am confident about our performance this year, excluding the impact of fewer returns, as well as the positive signs heading into next year, especially considering we achieved five times growth in the Credit Karma platform. We gained valuable insights that we plan to build upon in the upcoming year. Now, regarding your second question about AI, we were among the first to recognize over four years ago the disruptive potential of AI, which is why we invested in data. AI, particularly generative AI, is ineffective without robust data, and our investments in acquiring a comprehensive view of consumer and small business data place us in a strong position. We view this as a significant accelerant. Our market encompasses a $300 billion total addressable market with only 5% penetration, primarily because most customers still rely on tools like Excel, Google Sheets, or bookkeepers. This low penetration largely stems from a lack of confidence. Our efforts over the past four years in data and AI, combined with our current investments in generative AI, are expected to drive acceleration for us. We have substantial scale in data, AI, and customer reach, along with unique data sets that allow us to provide solutions to our customers that are difficult for others to replicate. Therefore, we see this as an accelerant and are excited about the opportunities ahead, supported by the proof points we've observed and our ongoing investments.

Yes. Congrats, Sasan, thanks for taking the question. And Michelle, good luck on your next endeavor. I guess, Sasan, can you just talk about the state of the small business? There's a lot of debate on that right now. Obviously, you all had a nice quarter in SBSE. Could you just talk about what you're seeing there in terms of the different verticals you play in and frankly the ability for you all to upsell some of your offerings like payroll payments? Thanks.

Sure. Let me outline my response in two parts. First, we observe certain trends among small businesses both on and off our platform. Primarily, we see that while small businesses' revenues are still growing, this growth varies by sector. Overall, they are managing to grow, although sectors like real estate and lending are facing more profit pressures compared to others. Regarding customer cash reserves, approximately 70% of our long-term customers have more cash on hand now than they did before the pandemic, contrasting with newer businesses that started during the pandemic, which typically have less cash reserve. This reflects the current state of small businesses; they are experiencing pressure from consumer spending but are still managing to grow when considering the data points I've mentioned. As for our platform, we are committed to sharing the evidence of our resilience. For instance, our total online payments volume is at 20%, which, despite a 5-point decline, remains relatively healthy. Additionally, when we examine our overall performance with Mailchimp and QuickBooks, we see solid results particularly with mid-market customers and those who have been with us for a while. Our mid-market customer base is expanding, we're seeing payroll growth in the double digits in the U.S., and there's an increasing shift to our premium payroll products. In summary, while we face challenges, we remain resilient and are optimistic about our sustained growth and the positive direction of our key performance indicators as we approach the next year.

Thank you for the question. Michelle, it's been a pleasure working with you over the years, and congratulations on your accomplishments. Sasan, I have a question regarding taxes and how they have evolved this season. I noticed that overall filings are down due to fewer people receiving refunds, and it seems DIY has likely played a larger role in this. However, I'm curious as to why TurboTax appears to be losing market share in this situation. Can you explain why the impact is greater for you compared to others? Additionally, there have been concerns about an extended tax season and the potential for about 10% of filers to submit their returns after the cut-off, which could extend into your next fiscal year. Did this have any significant impact on your results, or might some of the current tax strength simply carry over into the next fiscal year?

Yes, great question, Keith. To address your inquiry about our share, the majority of individuals who previously did not file taxes entered the do-it-yourself category to access their stimulus dollars and tax credits. Most of them found it easier and quicker to obtain their credits this way. These are the filers who have since exited the do-it-yourself category. The decrease in our share is simply a matter of numbers. We hold the largest share in the do-it-yourself space and captured a significant portion of those new filers during the pandemic. When they left, the numbers naturally reflected this shift. Those who came in just to file for the credits are the same ones who departed, which gives us confidence when analyzing our retention cohorts moving forward and also reflects in our TurboTax Live performance that we discussed earlier. Regarding extensions, while there are some financial implications, they are not significant compared to our overall $14 billion revenue, which is why we did not highlight it.

Thanks for taking my question. And Michelle, it was great working with you. Good luck with your next endeavor. And Sasan, I want to dig into Mailchimp. It's good to see that acceleration to mid- to high-teens growth in Mailchimp. So, could you talk about like you made some changes, how much of that contributed to growth versus what are you seeing in the demand environment? Is macro really a headwind at this point? What are you seeing in the spending pattern on marketing from your customer base? And how sustainable is that going forward?

Was the last part of your question how sustained is that going forward?

Yes.

Okay. So thank you for the question. First of all, very consistent with what I've shared in the last probably 18 months or so, we felt and I felt very strongly that the opportunity that we had with Mailchimp is how we bring it together with QuickBooks to truly create one platform that becomes the source of truth for running your business. And in an environment where we now have access to, with our customers' permission, the data applying AI and generative AI, we can now shift the platform to a place where we can do everything for you and deliver insights to help you manage your cash flow, to help you grow your customers, and that's really the ultimate game changer that we are focused on. With that said, the thing that I've been very consistent with you all is that this is all about execution. So, all of the progress that you're seeing us talk about in Mailchimp is all better execution. It is not any macro tailwinds. This is from the talent that we've put in place at the leadership level and the talent that we have upgraded across Mailchimp to then end-to-end. We've been revamping the website. We have looking at business model innovation and our line-up that we've made improvements. We're improving the product. We're doubling down on mid-market. And not only getting our existing customers to understand what features and functionality that we have to deliver the benefit, which helps us with retention and expansion revenue, but also the new customers that we're getting, assisted onboarding, and using a lot of our AI and virtual expert platform capability. So, those were sort of illustrative examples relative to why we're seeing paid conversion increase, paid customers increase or seeing better retention and better revenue per customer; it is all execution. And I expect this to continue to improve our execution, and coupling that with what we're doing across the QuickBooks platform, truly creating one platform that becomes a source of truth for your business. I am excited and bullish about the future possibilities of what we can do for small businesses, particularly with what's possible with data and generative AI.

Thank you very much, and best wishes, Michelle. Sasan, I believe I have a question regarding double taxation. You mentioned that the IRS is down 1% year-to-date and projected to be down 2% through the end of July. I'm curious about what factors might contribute to a further decline in your opinion, and how you see this impacting future years, especially if you believe this decline is primarily due to pandemic-related issues and we eventually return to normalcy. That's my first question. My second question is about the historical unit growth of TurboTax, which you're forecasting to decline by 5%, and revenue per return, which you expect to increase by 12%. Typically, the sum of these would indicate Consumer segment revenue growth of over 7%, but you are guiding for just 5% to 6%. Is this guidance cautious, or could there be some financial products you weren't able to sell, leading to lower revenue per return? Alternatively, could it relate to something not directly tied to TurboTax? Thank you.

Sure, Scott. Let me take your first question. There are two assumptions that we are making based on all the data that we have and what we see from last year. One is, there was actually a lot more extensions last year than we view will take place this year, even with the states that have pushed out. Plus last year, there were more filers. This is in the bucket of the pre-pandemic era or the pandemic-era filers that came in to get their stimulus money and their tax credits. There was still a lot of those filers last year through July and a little bit beyond. And so when we take out those filers and we compare to the extensions last year, our view is that IRS will be down 2%, and so that has, of course, an impact, 2%, which has an impact on the performance that we talked about. Secondarily, we really did an incredible amount of analysis to make sure that we had an understanding of these pandemic-era filers and are they all sort of out. And the reality is there's no more stimulus or tax credits to be had by those filers. So based on all of our analysis, they are out. And so therefore, we expect this year that IRS at a minimum is going to be flat. And of course, when we guide, we'll share with you what we've assumed in our guidance in August. But we would assume, at a minimum, it will be flat, maybe even up, but at a minimum, flat based on the reasons that I just mentioned. So that's the first part of your question. The second part of your question is a really good one, and I'll get to the specifics in a moment. I think just sort of reiterate even in an environment where IRS returns went down, our future is TurboTax Live. And our future is the growth of what we can do with our Live platform, especially with the data and AI capabilities. We have to really disrupt the assisted segment. And our real focus going forward is going to be the growth of our TurboTax Live platform both in terms of customer growth and revenue growth. And I may just ask Michelle to weigh in on this, but this comes down to just pure math in terms of when we look at our units and we look at what folks paid for, and sort of adds up to the 12-point speed up in ARPC. It's really nothing beyond that. But let me just ask Michelle. Michelle, would you weigh in on that point at all beyond what I just shared?

Sorry. I'm having trouble with the mute button there. No, Sasan, some of it can just be also rounding with units and returns. And so I wouldn't get overly concerned on that, Scott.

Got it. So the headline is the 12 points in ARPC growth is sort of very tangible relative to the units that we got.

Great. Thanks for taking my question. A couple more on tax. I think you mentioned before that overall retention, because of the factors you mentioned on the call already, is going to be down this year. But could you focus in on just Live retention given how important that's going to be for the future of the platform? How did that shake out this year? And if you could share in terms of Live customer growth, are you getting more from takeaways from competitors? Or is these DIY customers trading up to Live? Any color you can provide there would be helpful. Thank you.

Yes, you're correct in what we mentioned earlier about expecting retention to decrease by over a point. We'll provide more details at Investor Day. This decrease is primarily due to pandemic-era customers who have now exited our categories. Overall, we are pleased with the mix we've observed on our Live platform, and we will share further specifics at Investor Day. We have positive expectations regarding retention and returning customers. Additionally, we see a combination of customers who previously filed their taxes themselves but opted to upgrade to the Live platform due to changes in their circumstances, alongside those who were previously assisted. It's important to note that a significant portion of our competition comes from local tax preparers, where many people tend to go for their tax services, and we see a lot of transition from these competitors. We appreciate the balance of retention from those who filed on their own last year and those moving to Live due to confidence or concern. This mix is advantageous for us and we believe it will persist. As we scale full service, we anticipate that our penetration in this area will increase at a faster rate than it is currently. This is how we envision the landscape.

Thank you. Thanks for squeezing me in. One question on Credit Karma. You kind of raised the guidance there, and that came after a quarter where we had a lot of turmoil in the financial services industry with the regional banks, etc. Can you talk a little bit about what you saw this quarter in terms of the extra headwinds that obviously played out there, but you're actually doing better than what you had guided previously? Thank you.

We're actually continuing to see strength based on our innovation in a couple of areas. One is in cards and in some parts driven by our Karma Guarantee, which is really unique to Credit Karma, where the certainty is very high for a member to get approved for what they are looking for because of the data and AI capabilities that we have. The second is Credit Karma Money. And this is where, as I always have shared, we are building a consumer platform to be the destination for consumers with the integrations that we're doing with TurboTax and Credit Karma. And in essence, we saw a 45% increase in the number of TurboTax customers that chose to put their money on a Credit Karma Money account. And not only do we make some revenue on that, but over time, based on the higher frequency of the engagement, we can ultimately monetize even further, which were not in the numbers that I just mentioned. So really, it's across our innovation in cards and Credit Karma Money. That's why we saw the performance that we saw in the quarter. And then with one quarter left in the year, we, of course, have confidence to improve the guidance that we provided to what Michelle shared earlier.

Great. Thanks for taking my questions, guys. We saw the press release related to the IRS direct filing program, but I just thought maybe, Sasan, if we could hear what you think are maybe the largest potential threat of that study that came out as part of the Inflation Reduction Act last year?

Yes. Sure. Thank you for the question. I'll share a couple of perspectives that are really consistent with what we've talked about, but this is probably an important time to reiterate how we think about it. First and foremost, I can't vouch for their study. I can simply vouch for the facts that we have and the facts that are already in the market. And I think the first one is free tax software is already available to all consumers, and the awareness is actually quite high. That's the first thing that I would just remind us of. I think the second thing I would say is a reminder of this will yet be another free tax software in the marketplace. And I would just say, if you look at the last four-plus years, there were several entrants, big entrants, into the free tax software. One was Credit Karma before we acquired them, where they have 100 million-plus customers, a trusted platform. And they entered into the market of providing free tax software with sort of very little to no impact. And then another very large player that we sold Credit Karma tax to when we acquired Credit Karma. And you can, of course, observe what their results are. The point is that free tax software is already available, has been available to every consumer, and the awareness is extremely high. And so to have another sort of free tax software that's available is really immaterial is the way we think about it. And I'll remind us, by the way, it's actually not free. This is going to cost taxpayers billions of dollars, and so it's really not free. And I think the last thing I would say is really back to our vision. Our vision has been from what we declared four years ago to really become a consumer platform of choice, which means that beyond serving you to help you get your taxes done, we're delivering benefits through Credit Karma beyond tax, which means we can monetize beyond tax. And really, out of the $35 billion TAM in tax, less than $5 billion to do-it-yourself. And really, our biggest opportunity is the other $30 billion we're going after, $20 billion of it being consumers that have somebody else get their taxes done and $10 billion being business tax. That's our future. That's our presence. That's where we are focused. And so net-net, when I think about the IRS study that was announced, I think it's a study. Facts are friendly, you look at the facts in the marketplace, this is for us, this is really not a threat at all.

Thank you. I have a question about the TurboTax ARPU number. You’re anticipating a 12% increase this year, which is impressive. Can you provide more details on that? TurboTax Live seems to be a significant factor. Were there any other influences, such as changes in the premium mix? Also, regarding TurboTax Live, what do you think is driving its success? We’ve noticed the ads this tax season promoting that TurboTax will handle taxes for users. Is it mainly due to increased awareness of TurboTax as an option for assisted tax preparation? You've been working on this for several years, so I’d like to know what’s contributing to this effectiveness. Thank you.

Yes, Brad. You've highlighted that our increase in ARPU, following increases in previous years, is largely due to TurboTax Live. It is a game-changing pricing option that offers significantly higher ARPU, especially from premium customers who are either self-employed or investors and who opt for our premium SKU, which carries a higher ARPU. These factors are major contributors. What excites me most is the insights and learnings we've gained this year that will guide our focus as we prepare for next year. One key point is full service, which has achieved product market fit and is now at scale. This year, we achieved an 84 Net Promoter Score, the highest across the company, even surpassing Credit Karma's score. Although it had a modest impact this year, we were careful to ensure we had the right product market fit to meet customer needs. To our surprise, we found a strong product market fit, and we plan to focus on that next year. Additionally, we've learned how to effectively engage customers with our experts, which includes both our AI capabilities and human agents depending on customer needs. They assist customers in understanding their refunds and balance changes. These insights, combined with our go-to-market strategy, helped drive this growth. We believe there is significant potential for more growth in the future based on these insights, and that will be our focus as we move into next year.

Yes. Just to say thank you for all your great questions, and many thanks to our employees and customers for their amazing focus and being part of this storied franchise, and we look forward to seeing all of you at next earnings. Thank you, everybody.