Good afternoon my name is Sa-il, and I will be your conference facilitator at this time. I would now like to welcome everyone to Intuit's Third Quarter Fiscal 2014 Conference Call. [Operator Instructions] With that, I will now like to turn the call over to Matt Rhodes, Intuit's Director of Investor Relations. Mr. Rhodes, you may begin. .

Thank you, sir. Good afternoon, everyone, and welcome to Intuit's third quarter fiscal 2014 conference call. I'm here with Brad Smith, our President and CEO; and Neil Williams, our CFO..

Before we start, I'd like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations.

You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2013 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement..

Some of the numbers in this report 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.

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As a reminder, all reported results exclude Intuit Financial Services and Intuit Health, which have been sold and reclassified to discontinued operations. 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 Brad Smith. .

All right. Thanks, Matt, and thanks to all of you for joining us. Today, we reported third quarter revenue of $2.4 billion, up 14%. Overall, I feel very good about our performance. Let me begin by sharing my reflections on the quarter, starting with our Consumer Tax business. .

In the U.S., TurboTax Online units grew 14%, and total TurboTax units grew 10% for the season. Both results were double last year's growth rates. Our investment in product improvements paid off across the board, and we now expect Consumer Tax revenue to grow about 7% for the fiscal year, handily beating the original guidance of 4% to 5%.

Our goals this year were to accelerate growth in the DIY digital category, acquire and retain more customers, and take share. We succeeded on all fronts. .

As we regularly discuss, there are 4 main drivers of growth for TurboTax. I'll walk through each of these drivers and I'll highlight how we performed versus our expectations. Total returns received by the IRS grew slightly faster than our expectation of a 0.5 point.

The DIY software category gained about 1.5 points of share from alternative methods, compared to the 1% that we had expected. In fact, IRS data show that DIY e-file growth was up more than 6%, contrasted with the assisted e-file being up less than 1% for the season..

Within the DIY software category, improvements in our TurboTax product and our go-to-market execution drove a gain of about 2 points a share. Our plan was to win share within the context of a multiyear journey towards our ultimate product vision.

But we made great strides this season, focusing on improved experiences for new filers with simple returns and for returning users. .

And finally, while we delivered revenue growth above our guidance range and achieved our goal of growing our customer base several points faster than revenue, the end result was a decrease in revenue per customer of about 3 points for the season.

This was expected, as we sought to build a strong foundation for the future through category and unit growth..

While these are compelling metrics, I'm most proud of the results we generated on our product investments and our end-to-end experience improvements. We spent 10% less on TurboTax marketing versus last year, yet we increased traffic and both conversion and retention improved.

In addition, our support calls declined by more than 20% and our Net Promoter Scores improved as well. While our primary goal was to take share this season, these products investments and an effective marketing strategy, drove Consumer Group margin expansion as well..

On the ProTax side of the business, we had strong new customer growth in our higher value offerings. And while we're still in the early days of delivering our ultimate online product vision for the professional accountants, our Intuit Tax Online units grew double digits as well.

As you're going to see in our updated guidance, we expect the ProTax business to come in at the high end of the range. Now shifting to Small Business, our cloud solutions continue to build momentum and our subscriber growth is accelerating..

QuickBooks Online subscribers grew 36% in the third quarter to 624,000, adding more than 60,000 net customers in the past quarter. QuickBooks Online subscribers outside the U.S. were up more than 130% to 64,000, further accelerating from the 90% growth last quarter.

Total QuickBooks subscriber growth, which includes QuickBooks desktop and Enterprise plans, grew 30%. And we're quickly approaching the 1 million subscribers milestone. And last, but not least, Intuit Online Payroll subscribers also grew 23%.

Each of these growth rates represents an acceleration from the prior quarter, and we are quite pleased with the ongoing success of our online ecosystem..

As we look ahead, our goal is to win every new small business customer and to win every cloud decision with the new QuickBooks Online. In service to this goal, we expect our desktop units to decline, and that is a trend that continued once again this quarter. .

On the payments front. As we mentioned last quarter, we shifted our strategic focus to QuickBooks merchants which support our ecosystem approach. We improved our payments integration within QuickBooks and we simplified our pricing. More than 80% of new customers are now selecting our pay-as-you-go pricing model instead of paying a fixed monthly fee..

As a result, our current period growth rates are being impacted by these decisions. But we think these are good decisions, as we've realized our pricing to be more competitive and we've consciously shifted away the emphasis from the non-core payments businesses.

Even with the strategic repositioning of our Payments business and the business model shift to the cloud in QuickBooks, we continue to expect Small Business revenue growth at 10% this year..

So to put a bow around our progress so far, the secular shift to the cloud is powering our strategy. We're delivering awesome product experiences, we're leveraging the contributions of others and we're capitalizing on data to deliver real customer delight. Executing against this strategy, we won this tax season.

And on the Small Business side, our subscriber growth in the online ecosystem continues to accelerate, both domestically and globally..

So with that overview, I'll turn it over to Neil to walk you through the financial details. .

Thanks, Brad. Let's start with overall company results. For the third quarter of fiscal 2014, we delivered revenue of $2.4 billion, up 14%; non-GAAP operating income of $1.56 billion, up 16%; GAAP operating income of $1.49 billion, up 17%; non-GAAP diluted earnings per share of $3.53, up 20%; and GAAP diluted earnings per share of $3.39, up 25%..

As you know, these growth rates reflect revenue shifting from our second quarter to the third fiscal quarter. .

Now turning to the business segments. Total Small Business group revenue grew 8% in the third quarter. Within Small Business, Small Business Financial Solutions revenue grew 4%, QuickBooks revenue grew 7%, while Payments revenue was flat. .

Our financial performance reflects our ongoing strategic shift toward our online ecosystem and core payments offerings. Customer acquisition in our online ecosystem continues to drive growth. QuickBooks Online subscribers grew 36%, QuickBooks Desktop subscribers grew 22%, QuickBooks Enterprise subscribers grew 18%.

QuickBooks desktop units declined 12% versus last year, as we continue to lead with our online ecosystem. The shift in business model and the acceleration of QuickBooks Online growth, combine to lower Small Business revenue growth by about a point this fiscal year..

Payment Solutions revenue was flat. One click down in payments, we continue to see diverging trends in our core and non-core businesses. QuickBooks payments revenue grew 5%, driven by increased adoption of our cloud solutions.

Revenue from our non-core Payments business declined about 20%, and these non-core businesses represent about 10% of total payments revenue..

Small Business Management Solutions revenue grew 16%. Employee Management Solutions revenue grew 13%, driven by strong growth in online customers across do-it-yourself and assisted offerings. Demand for subscribers grew 44%, including the recent acquisition of CustomerLink. Subscribers grew 28% organically..

Within the Consumer group, Consumer Tax revenue grew 14% versus the third quarter last year, driven by customer growth. As Brad mentioned, our margins improved nicely this season.

While I'm pleased with the performance, we expect to continue to invest in the product experience and to prioritize growth in share and customers above margin expansion over the long term..

Our ProTax business also had a great season, with much of our customer growth coming in our higher value solutions. ProTax revenue was $334 million, up 32%, reflecting the shift in large part from Q2 to Q3. Year-to-date revenue growth in ProTax is about 3%.

As a reminder, we made some changes to our ProTax offering that will shift revenue into the fourth quarter of this year and fiscal 2015..

Moving to our financial principles. We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield 15% plus return on investment. With over $2 billion in cash on our balance sheet, our first priority is investing for growth in the business. We also look for M&A opportunities.

And through the third quarter, we've made 6 acquisitions totaling approximately $155 million. When it's the best use of our cash, we'll return it to shareholders via share repurchases. We repurchased $23.4 million of shares in the third quarter and about $2 billion remains on our authorization.

We expect to reduce our share count by about 4% net this year. And our Board approved a $0.19 dividend for the fiscal fourth quarter, payable on July 18..

We provided our updated guidance for the fourth quarter and for fiscal 2014 in our press release. And with that, I'll turn it over to Brad to close. .

Thank you, Neil. So we're pleased with our strong finish to the tax season. We grew the digital category, took share and plan to come in above the high end of our original revenue guidance range in Consumer Tax. However, as we shared before, we're just getting started.

It will be a multiyear effort to reimagine the tax preparation experience, but our teams are already working on the product for next season. .

On the Small Business side, our momentum continues to build and our transition to the cloud continues to accelerate, driving value for customers and for Intuit. We see a lot of opportunity in front of us, and we remain deeply committed to accelerating customer and revenue growth. And with that, we'll turn it over to you for your questions. .

[Operator Instructions] And our first question comes from Peter Goldmacher from Cowen. .

So you guys talked a lot all season about how you were going to take a half a step back from tax and really start working on the product. And you sacrificed -- you held pricing flattish to gain share.

Can you talk about what we should expect next year? I don't need guidance, but do you think that you have -- you guys brought in enough customers this season that even if you hold pricing flat, you can get that growth again? And what happens with the product? And then talk a little bit about your learnings in tax and how they apply to the Small Business products?.

Okay, Peter. Thanks for the question. So first of all, yes, we believe this year sets the foundation for a strong future next year. And the reason being has got a couple of pieces to it. First of all, the way that we see continuing to grow the franchise is to first expand and accelerate the do-it-yourself category.

And it's been running in the 3% to 5% growth range. And this year, we've got it up over 6%. The second is we know if we bring customers into the franchise, next year, they tend to come in and not only do they use our product, but many times their taxes get more complicated and they move up the product line.

And that's good news for us in terms of customer growth in revenue. Behind that, we've also gotten a lot of really good learnings this year on product improvements. The team made big improvements to our classic TurboTax product. We've got a lot of good advances around simple returns and returning user experiences.

And we were able to take that learning and build it into our go-forward plans for next year. So we think the product will be even stronger. And when you put that together, the reason why we have the confidence that I'm communicating now, is because we saw all the key indicators move up and to the right. The category expanded. We picked up share.

Our conversion was up. Our retention's up almost 200 basis points. And our Net Promoter Scores improved to 4 to 6 points on each of the products. So we actually feel very good that those are positive leading indicators to next year. .

Brad, let me ask you -- let me just stay on this topic because you're making a really interesting point here.

Do you think next year, if you have the opportunity to keep pricing flat and grow your share again? Is that something that's interesting to guys? Or do you feel like -- do you feel compelled to deliver more revenue, more revenue growth rather than unit growth?.

Yes. So Peter, a couple of things. One is we've always tried to emphasize the important thing is to grow the category and to grow customers. And then ultimately, the average revenue per filer or customer will come as a result of mix and taxes becoming more complicated. So in pricing, we've always been as competitive on the low end as free.

And on the high-end, we take price for value because often we're competing with a higher priced alternative like a tax store. So we like our pricing strategy this year. And we think that continuing to apply that methodology going forward is a good way to continue to grow the franchise.

So yes, the answer to your question is, staying focused on growing share, growing customers and expanding the category remains our top priority and we'll continue to make the right pricing decisions on the low-end and the high-end to continue to grow revenue. .

And then, any application of your learnings to Small Business?.

Absolutely. This year, I think our marketing team in TurboTax were able to illustrate wonderful advances in how to take a spend and actually be a little more efficient in the spend. In this case, down 10%. But actually increase traffic and conversion to the product. So there's a lot of lessons there that the rest of the company is learning from.

Another thing that TurboTax did this year is they revamped their customer support model using Live Community, as well as online help. And we reduced the number of customer contacts by about 24%. And we were able to take that investment and put it back into advancing the product.

So there's a lot of good lessons from TurboTax that we've already shared across the company for Small Business and the other parts of the company as well. .

And our next question comes from Walter Pritchard from Citigroup. .

Brad, I wondered if you'd talk a bit about the units on the traditional QuickBooks side. We understand what's going on here in terms of the online units accelerating into the mid-to high-30s here. And you saw the QuickBooks units go lower than you've seen in the past.

So I'm just wondering, help us on our expectations for sort of how much those could diverge? And do we expect to see the QuickBooks traditional units go even more negative here than they are right now, as you accelerate the transition online?.

Yes, Walter, thanks for the question. What I am excited about is that we are getting faster acceleration to the cloud than we originally had forecasted ourselves. And it's not happening to us.

The team has continued to get smarter, run experiments, and we're finding things that are helping us incentivize customers to move off the desktop into the cloud, where we know it's a better experienced for them and, quite frankly, a better lifetime value for us.

So what I would say and what we communicated a few minutes ago is this decline of about 12% unit growth in QuickBooks desktop, we don't see slowing down. And if we actually are successful, we see that accelerating as we head into fiscal year '15. Our ultimate goal is to win every Small Business customer and to win every cloud decision.

And that cloud decision may be an existing desktop customer, either ours or a competitor's, or it may be someone coming into the market for the first time. But we want to continue to accelerate to the cloud. And the thing we want to make sure we're doing is making it a very clear value proposition, that, that's a better solution for them.

And so we expect QuickBooks desktop units to continue to decline and we expect to continue to push the accelerator in QuickBooks Online. .

And then can you just -- I think you've had this challenge with some of your add-on products, payroll and payments, that you haven't have those in the channel with the online customer the way you have with your desktop customer. And I know you have plans to move those there.

Have you at all accelerated those plans to move some of those offerings into the online channel, given the acceleration you're seeing and uptake of the online offering overall?.

We have. In fact, we've been seeing very strong results when we introduced the new version of QuickBooks Online in the U.S. In this past quarter, for example, payments is up 32%. So the penetration rate of payments into new QuickBooks Online customers is actually ramping up very quickly. And we're seeing very strong results in payroll as well.

So the attach rates to the new version of QuickBooks Online are actually higher than they were on the old QuickBooks Online. And we're quickly moving up the, basically, the adoption rate towards where we were with desktop.

We still have a lot of runway ahead of us to get all the way to the point of desktop, but we're seeing it a much easier experience, to sell additional services within the new QuickBooks Online. .

And our next question comes from Brent Thill from UBS. .

Brad, you mentioned the realigned pricing. And when you go to QuickBooks Online on your website, you're offering 40% to 60% discounts.

And I realize you run promotions at a lot of different points in the company's life cycle, but can you just talk about some of those discounts to push people online? Are you willing to continue to use price to get people to move over? And I guess, just a follow-up for Neil, when you think about this realignment to the cloud, your aspiration has always been to me, a 10% growth.

But there was clearly a shortfall relative to the reported number on the Small Business side that I think we all were looking for.

Is this expected to last a couple of years? Is this another year? How long do you think this will last in terms of this transition? And I guess, why not accelerate and just pull everything out of the channel?.

All right. So Brent, we'll double-team on that. I'll start with the first piece which you directed to me.

Realigned pricing was referring to, not only the decision in payments, where we got rid of a lot of the convoluted if,then statements in our pricing model and got it to a very simple 2-tiered scenario, where you can have a monthly fee and lower transaction fees or you can literally have no monthly fee and then simply pay as you go on a per transaction basis.

That's driving accelerated adoption of new payments customers. And we think that's going to pay big dividends, not only in the customer experience, but in the charge volume as we look ahead. To go to the promotions on QuickBooks Online, as you know, today, if you look at the price of QuickBooks Online, it's about $26 a month.

And that compares to a desktop customer who is at about $200 any time they purchase it, and they upgrade every 2.5 years. So we have room to discount and incentivize people to come in and use QuickBooks Online because we know it's very sticky.

Once you come in, you start using the accounting app and you've keyed all your information in, you're going to stay. And so we think and actually believe that using promotion to incent trial and then, ultimately, that leads to a higher lifetime value.

It's a very good way to grow the franchise, even if it takes a short-term hit in the revenue in the current period, it has proven to build 140 index to the prior lifetime value we were getting off of the other model. So it's a good way for us to grow the franchise long term.

I'll shift it over to Neil to answer your question about how long will this transition last and what is our thinking around it. .

Yes, Brad. And Brent, thanks for the question. We still think, longer term, our financial principles are the same to provide organic revenue growth in the double-digit category.

What you see in Small Business though and even in tax, to a certain extent, are some pretty significant transformations in the business model, in the way we deliver service and in the way customers pay. And we know, we're convinced, and I know you are -- you agree with us, too, that this is the right thing for the customer long term.

It's a much better customer experience and the product works a lot harder. Our goal remains to add customers and to really get deeper penetration into the people who don't use software today. So QuickBooks Online has proven to be a great tool to do that.

And we're not going to let the business model itself stand in the way or any short-term goals, as long as we can really show that tight improvement in customers that you're seeing in Q3 and for the year overall in our online ecosystem.

And we've talked about our lifetime value compares last Investor Day, you know that on the online products, it's a significant improvement over desktop. We'll be updating that for you again in August and giving you some more clear milestones or guideposts that you can track going forward.

But we think this business model transition is a really good thing. And we want to do everything we can to incent customers to use our products and to use our online offerings as soon as they're ready. So I wouldn't be caught up in any short-term concerns about guidance.

But as long as the long-term story is tight, and you can understand it and see when the turn comes. .

Our next question comes from Gil Luria from Wedbush Securities. .

On tax, you talked a lot about why you gained share this year. But I wanted to see what your perspective is after having completed the tax season, about why the category reaccelerated. It's been decelerating over the last few years, the growth of the digital category. And this year, it seems to have reaccelerated.

What do you ascribe that to?.

Yes, Gil. I'll share a hypothesis that we have and, of course, it's going to depend about how more data comes out from all the players in the market.

But when you are a category leader, and now we have about a 63% share with the 2 points we picked up this year, it's our responsibility to champion the category and convince people who may not be using software that it's a good alternative. And this year, I believe, our marketing did a great job of doing that.

The campaign, "It's amazing what you're capable of", resonated with consumers, have received a lot of recognition from the industry pundits and the people look at advertising. And collectively, I think, that continue to build upon what is already a secular shift, where digital has been growing in that 5% range.

And I think just our ability to get that message clear to people who maybe didn't consider software in the past helped accelerate it a little bit more. So that's our responsibility.

And I think that this year, our team and our marketing efforts were a little bit clearer in why people should try software, and we're going to continue to do that next year as we push further to try to expand the category. .

Makes sense. And then, international QuickBooks Online, you're -- at this point, you're going on offense.

At the rate you're expanding, would you ascribe that to accounting -- to accountant incentives? Or what -- how did you keep accelerating the growth of QuickBooks Online international?.

Yes, Gil. I'm glad you called it out. I mean, 130% growth this quarter on top of 90% growth last quarter, I mean, really strong progress. The first thing we did, we step back and we say, "We can't treat it as a group of countries. We have to understand how to win in every country.

And to do that, we've been closing gaps in the feature functionality or local compliance on a country-by-country basis, either through third-party partners that work with our platforms or small little acquisitions. And the second is exactly where you went.

We have really been working hard with the accountant channel who's the primary source of referrals and recommendations. And we've seen that flywheel continue to accelerate week over week as they get really comfortable with the new version of QuickBooks Online and they're encouraging all their clients to use it.

And it's a combination of those 2 things, a country-by-country game plan to localize the product, in addition to working with the channel, with the accountants, has really continued to push that momentum forward. .

Our next question comes from Greg Dunham from Goldman Sachs. .

I wanted to follow up on Brent and Walter's question because I do agree, I mean, accelerating the transition timeline is going to be better for the business and the customers, long run.

I guess, the question is, is there any way you can help quantify what that transition, that impact is on the growth rate in a given quarter? Or -- and help frame kind of here's where we are now, here's where we expect to be next year and 2 years down the road. I know you did that at the Analyst Day, but any update on that would be helpful.

And then, a second question on payments. You provided some context in terms of what's causing that to flow currently.

When do you think you're going to get to a more normalized growth rate on payments?.

Okay. .

Hey, Greg, this is Neil. And I guess, I would tell you, for this year, for FY '14, we think the impact, just as a business model shift from desktop to QBO, is about a point of revenue growth on SBG.

And we'll do -- we'll go in more depth on that in August around Investor Day when we give guidance for next year because, clearly, we see the pace accelerating. And that's going to make the -- it could make the impact more significant. But we'll break that out for you and show you how we think about it. But we think it's about a point on FY '14.

The other big thing that's impacting our small business revenue overall is payments, as you brought out.

And the team there is in the midst of a really big transition to -- from a platform system that enables a much simplified pricing, which is the #1 detractor we've heard from customers and it's addressing that already for customers who have moved to the simplified pricing platform.

And also moving out some non-core payments businesses that really were not connected to our QuickBooks ecosystem and, frankly, weren't good prospects to connect down the road. So those 2 things, if you strip those away, payments would have an okay year this year.

Payments customers and charge volume would be up about 7% in Q4 if you normalize the non-strategic things out. And so -- and those are decent numbers.

They're not nearly what we think the potential is of the segment long term, but we've got great people working on this now and they've got some great plans and ideas with the attach rates to QBO going forward and the pricing structures and all that. So we'll give you more clarity as we start talking about guidance for FY '15.

But we think the outcome with the QuickBooks ecosystem is very consistent with the principles we've talked about in this business for a long time. And we think the potential is really, really strong. But we'll break that out for you. We think that impact this year is about a point.

It will be more next year, possibly, if we see the acceleration of QBO continue as it is now. But we'll give you some detail behind that so you can understand it and get your head around it in August. .

Our next question comes from Jennifer Lowe from Morgan Stanley. .

I wanted to go back to the tax season a little bit and maybe follow up on Gil's question because on one hand, it seemed like a lot of the promotional activity was really focused on potentially free customers.

On the other hand, I know at Analyst Day, there was a lot of discussion around some of the services that you are offering in terms of giving people potentially a little more handholding through the process as a way to compete more effectively with Paid Preparer.

So just curious if you had a feel for, as you look at where new customers came into the funnel from, did you get a good sense of whether you were competing more effectively with professional or whether that was a higher convert from manual? Any color there would be helpful. .

Yes, Jennifer, we'll go deeper as we start to unpack the season at the Analyst Day. But I will give you the hot-off-the-press stuff as we're sitting here. First of all, the promotional offer was very limited. It was a surgical strike. It was around the first peak in season and it was really by design.

And we tried to foreshadow that when we talked to the market. And it was, in essence, targeted to very simple returns. People who file a very simple return that we believe overpay to get that tax return done. And so, what we did is we improved the product this year. We had a better offering and for what we call the value tier.

We included prior year imports. We included W-2 download. We stripped out a bunch of unnecessary questions. You can get your taxes done very quickly. We made the refund very transparent for you. And we brought the state pricing more in line with where we saw a good competitive price value should be.

And in doing that, we've always had a disproportionately low share in that segment. This year, we think we took back a good portion of the share that we believe we should have.

At the same time, we were able to take forms out of our mid-tier product and move it up into the higher tier so that we had a right-for-me product and price for other customers, and we saw good movement in mix there as well.

So what I would say is our focus as we come out of this season is we focused on the simple returns, and we think we had a good product and we think we had a good cross value relationship and that helped us grow share.

At the same time, we were able to get our other product improved and we moved forms in between the different SKUs, and we saw a good mix shift that helped us with the higher end.

And as we look ahead to next year, I think you're going to see us continue to push the envelope further towards our vision of taxes being done, eliminating the cognitive burden, reducing the number of questions you have to answer, getting as much information into the product as we can and, basically, making that the point of differentiation.

I would summarize by saying this, we've always had free in this industry. Free has existed since the early 2000s, and we introduced a free commercial product 2004. This year, we had a free product just like our competitors. We have one competitor who was actually was with us step by step on pricing for everything else.

The difference is we took share and that competitor lost share. And the difference wasn't price, the difference was product. .

Our next question comes from Brad Zelnick from Macquarie. .

Brad, as you reflect on this year's tax season and you think about it on the product level, 2 particular favorites of mine, I was hoping maybe you can give us more insight into how they performed. One, on the mobile side of things; and two, CPA Select, which sounds like a real promising strategy.

How did they do?.

Yes, thanks, Brad. First, on the mobile side, we continue to push the envelope with our original mobile offering, which was SnapTax. This year, we continued to simplify the products. We introduced a Spanish, as well as an English version. And we saw continued high user ratings and downloads of that app.

But we also had some new learnings, which is not unique to other industries but, for our industry, we were able to capitalize on it. And that is, if you move out of app stores, a lot of people still want to use their phones and tablets to interact, even if they haven't downloaded an app.

And so, this year, when we changed the product in TurboTax, we made it a responsive design, which means you could go into TurboTax online on your tablet or your phone and it would adjust to the screen size and basically present the questions in a way that was easy to interact.

We saw a 40% lift in people who are doing at least one log-in through a phone or a tablet to get their taxes done this year. That was a significant improvement and it gives us a lot of encouragement in the direction we're heading for next year.

So around mobile, good improvements around SnapTax, but big learnings around how to use responsive design and actually increase the number of people using the mobile device to do some portion of their taxes.

If you get a CPA Select, for those who may not know the context here, this is the ability for us to take a big portion of people who may come into TurboTax.com and, for some reason, lose confidence and feel like they wish they had someone who could assist them with the process.

What we're doing is we're connecting all that traffic from TurboTax.com to some of the CPAs that buy our tax software, whether it's Lacerte or Pro series. This year, we were in beta. We had 500 CPAs who signed up. Those 500 CPAs processed 4x the number of returns than we did last year. And the Net Promoter Score for the CPA Select was a 79.

And so, it continues to eclipse -- an average CPA has a Net Promoter of a 51. This is 28 points higher. So we're very encouraged by CPA Select. And I think you'll see us continue to lean into that as we go into next tax season. .

Very helpful insight. And if I could just follow up, Brad, on the Small Business side.

QuickBooks Online, momentum seems to be fantastic and I just wanted to ask specifically about your partnerships with Square and Amex? And am I stretching to think that in any way those partnerships might be helping online adoption?.

Yes, Brad. First of all, we are very excited about those partnerships. We also have others that are in the works. They're still early days. I certainly believe they add value to the platform. They're encouraged with the early results, as are we. And so, I would say, yes, they are helping.

I don't know if it's stretching or not to say they're the reason why we're accelerating because, clearly, we're going after a platform approach and they're still pretty early days in terms of volume. But I do think it illustrates the point, this is not your granddaddy's QuickBooks Online.

This is a new platform with open APIs that serious players, like Amex and Square, see value in. And there's a real compelling reason for small businesses to try it as well. .

Our next question comes from Scott Schneeberger from Oppenheimer. .

Neil, I'll start with you, and then with you, Brad, a follow-up.

On the tax category, could you discuss a little bit about the timing and magnitude of marketing spend for Consumer Tax as you move through the season?.

Yes, Scott. As Brad mentioned earlier, it's down about 10% overall. As you probably noticed, the spend was targeted around certain relatively large events, and it was not an intensity on a daily basis as we've had it in the past.

It was very targeted to areas where we know a lot of the target audience is going to be tuned in, are going to be watching, are going to be accessible. And as Brad mentioned, we monitor traffic very carefully. Our traffic improved nicely over this past season.

We still have almost 60% of the people who actually file returns come to our website sometimes during the tax season, unique visitors. But the spend this season was much more targeted.

It was targeted throughout, but it was focused in certain high points when we know there's going to be a lot of volume and to certain high-impact venues where we know we're going to see a lot of people, as opposed to being universally carpet bombed throughout the season. .

And then, Brad, convergence seems to be a theme. It's kind of a holy grail you had sought for the last few years, seeing a lot of people coming to the website and feeling that you get them but you just hadn't converted them. It seems like you had great retention, a lot of great new acquisitions.

Could you just speak a little bit to what was occurring there? Was it showing some of the pricings you gave in the state? Obviously, as mentioned, the improved website and especially the core categories in the early season? Is there enough of a momentum that you've built up this year that you can go a lot more of those folks next year without pushing too much on price again?.

Yes, Scott. I would tell you that the conversion piece was more attributable to an improved product experience and really driven by our data scientists and our data analytics team. As you know, we made an acquisition of Level Up. That team put a lot of their energy and focus with the rest of our data sciences on tax this year.

They saw points in the experience that were causing friction, where people were stopping and delaying for multiple seconds, where they saw where there was dropoff occurring. They rolled up their sleeves with our engineers.

We went in, we tuned the product and we got the funnel so tuned that we continue to see improved conversion everyday as we went towards April 15. In fact, I'll tell you, there was one portion, which is basically our non-campaign traffic that came to our homepage, so not anything driven by a TV ad, but non-campaign traffic.

It improved -- conversion improved 700 basis points in that one area. And as you know, 0.5 point or 1 point of conversion is significant. So I would say that the pricing piece was a reason to get people to say, come in and give this a shot. But it was really the product experience that drove the increased conversion and the retention.

And quite frankly, it was because we continue to look at data and analytics as a way to improve the experience. .

I have 2 more separate ones. I'll say them at the same time, just to sneak them in. First one, in years' past, you used hundreds of tax professionals to help. It sounds like you really reduced dependence on that and it was excessive. If you could you address of that a little bit more.

And then also, your thoughts going forward with regard to the ACA next year and how that will affect the pricing in the industry, yourself included?.

Okay. So first of all, on tax pros. Historically, what we've tried to do is we want to make sure that if a customer has a question, that we can answer it in a way that gives them confidence to go ahead and complete their return. And we've experimented with a lot of things and we're going to continue to be able to give you access to an expert.

That's what CPA Select is designed to do. But as we dug deeper and learned some of the lessons and, quite frankly, some of the mistakes that we made in the past, one of the things we realized is customers really don't want have a question in the first place.

So this year, by simplifying the product, stripping out questions that have absolutely nothing to do with your tax experience, we were able to reduce the number of questions or customers calling in by 24%. That's a big number, 1 out of 4 questions basically erased because the product is simpler.

The second thing the team did is they redesigned help and think of it like Amazon's mayday button. Instead of having 6 or 7 different places to go get help, there was one universal place.

And when you logged in, you could either get your answer through Live Community from some other user, you could get it from one of the experts who moderates that forum, or you could get it in product or you could click a button and call one of our agents.

And because that was all in one place, we saw a lot of people getting the answer without needing to make a phone call to an expert or even to one of our call centers. And so, just a better help experience, being inspired by other great companies like Amazon, helped us reimagine that. We will continue to have access to experts.

It won't be as human-intensive as it was a couple of years ago because some of the insights I just shared. But I do think you'll see us with CPA Select continue to say, "Look, if you do want to have a pro look at it, then we'll get you to a pro who can help you through that experience." I'll shift now to ACA.

The big piece here for us is we've been pretty clear all along that this is an important thing to make sure we can help customers understand, then understand the implications for them.

Do they qualify for a subsidy or do they owe a penalty? And then from there, to be able to take action on that insight, either help them file their tax return or connect them to our partner to help them buy insurance. This year, we had about 900,000 visitors to TurboTax help.

We had a very high Net Promoter Score on that experience, but we still fundamentally believe, based upon the experience that we've seen through our own customers, as well as what happened in Massachusetts years ago when this was implemented, that this will not drive behavior shifts from one tax prep method to another, if the tax prep company is doing their job.

And our job is to demystify affordable care, to answer your questions, to help you take action on that insight and basically help you through the process. And we are fully prepared and we're continuing to ramp up, so we'll be ready again next season. .

Our next question comes from David Togut from Evercore. .

Brad, could you update us on the timing of your launch for QBO online for manufacturers, the new version that will have inventory capability?.

Yes, thanks, David. Today, we have partners that you can link to, including the one that we just made an official member of the family. We just made the acquisition of Lettuce. The Lettuce's inventory capability has worked with QuickBooks Online through APIs.

And so, today, a manufacturer can use QuickBooks Online and then sign up for a third-party app and be able to solve those problems. Of course, we just announced the acquisition. Our goal was between now and, over the next 4 to 5 months, we'll get that fully integrated in, so that's an even more seamless experience.

And then hopefully, you'll see that come out as just a part of core piece of QuickBooks Online. But today, you can get that problem solved through a third-party app. But as we integrate Lettuce into our QBO product platform, you'll see that become more seamless over the next 4 to 5 months. .

Our next question comes from Tim Willi from Wells Fargo. .

I wanted to ask a question about payment, and then a follow-up on payroll, if I could. So just going to payments and the integration you talk about with QuickBooks. Obviously, this, I guess, integrated sales approach has gotten a lot more attention as of late with Vantiv buying Mercury and just general secular opportunity there.

Could you talk about your integration, not only with QuickBooks, but how you think about payments with the actual hardware and developer community outside of Intuit? And then, to what degree investments around vertical specific strategies or customer service might still yet to be quantified, if in fact that's something you think you may have to do?.

Okay, Tim, we'll take a stab at this. And let me know if there's any particular areas you want to drill deeper on. So I'll start with payments, and you said you'd get the payroll in a minute. So the first thing that we recognized is it's not sufficient to cross-sell a product to a customer in accounting and think you're going to get a lot of adoption.

It actually has to be at that moment of truth, when they're accepting a payment and they're logging it into QuickBooks, you want to make it frictionless for them just to accept that payment electronically.

And so, we have done a really serious job again with our data scientists to say where are those moments of truth when you're in the workflow where it's natural to have an ability to go ahead and accept the payment. And that deeper integration is helping us draw the attach rate up to the new QuickBooks Online.

The second thing we've done is because we know something about you already as a customer, instead of taking you through a credit app and then screening you to say, "Are we going to give you access to credit or not," we're prequalifying you in the background.

So there's no friction now where we have to stop you and then do a check on you to say, "Hey, are we going to let you sign up for credit or not." So that's reduced a lot of the friction in the activation and the basic sign-up process. The second thing we mentioned a little earlier is we've reduced the friction of price.

We now know that it's important to give customers just a limited set of options. One is, don't pay anything, just on a per transaction basis. The other is if you think if you're a high-volume processor, pay a low monthly fee and then pay a lower transaction, and either one of those give you a good price value relationship.

The third piece is the piece that you were asking about with partners. One of the very strategic decisions we made with the new QuickBooks Online is to be an open platform. Our primary focus strategically is on service-based businesses. Businesses that generate invoices and then wait 48 days on average to get paid.

And what we're doing is putting our payments capability into QuickBooks to basically make this an electronic invoice and an electronic payment in a matter of days and get the cash flow much stronger for small businesses.

Now there are a lot of other payments companies that are focused on retailers and restaurants where there's a physical point-of-sale presence.

And while we have one of our own products there, we've also opened up our API to Square, to American Express and to others to say, "Look, if they have really good, compelling products and hardware, we want that to work with QuickBooks as well." And so, we have opened up our platform to complement our own strategy so that small businesses can accept payments any way they want and we can sign the right commercial agreement to make that friction go away for the Small Business, and to help us grow our franchise as well.

So I know there's a lot in there. But hopefully, I touched on the 3 or 4 major buckets you were looking for in payments.

Did I miss anything?.

No, that's a good starting point. I'll follow up with Matt. .

Okay. .

Afterwards, go into a bit more detail. And then just on payroll, I apologize if this was asked. But just thoughts around sort of the cloud payroll environment. We've obviously have some visible IPOs around cloud-based companies.

And just your thoughts around sort of what those companies are targeting in the payroll, in HR space versus how you think about your offerings in your install base or new customer acquisition, if you will?.

Yes, I sure can. Payroll continues to be a very exciting space, especially as you transition to the cloud. Having been in the industry for half a dozen years before I came to this company 11 years ago, one reality about payroll in the small business space is the average number of people who switch to payroll decision is mid single digits every year.

And so, the real key is, are you there at that moment where they're either had an issue, they've had a tracer or an inquiry from the IRS where they've hired their first employee? Can you actually capitalize on that moment? And that's where having QuickBooks as our distribution channel gives us a very strong competitive advantage because we can see when they add an employee in QuickBooks.

And then, as a result, we can sign them up with an in-product message and our cost of acquisition is almost 0. But most importantly, we're there at that moment of truth to give them a solution immediately so that they can cut a check. Our online version of payroll this quarter grew 23%.

It continues to accelerate, and we continue to see strong growth quarter-over-quarter. And that, in conjunction with the ecosystem of QuickBooks, we think gives us a durable competitive advantage because it's not a standalone decision, it's already in the customer's office, and we can see when they add an employee.

And we don't have to send a salesperson, we don't have to do an online ad, we don't have to do a banner ad. We literally just enable the payroll right there and get the customer up and running. .

Our next question comes from Michael Millman from Millman Research Associates. .

You talked a little bit about Lettuce. I was wondering if, on this bunch of acquisitions you have made, if there's any you might consider that will become potential blockbusters as you combine them? And secondly, you talked at least about one of the acquisitions helping the tax.

Have there been other acquisitions, either standalone or acquisition-related, to the business and that have also helped tax business. .

Yes. Thank you, Michael. A couple things here. First of all, we're really excited about each of these half-dozen that we mentioned.

As you've seen, our pattern tends to be to look for talent and technology that either helps us round out a feature set, like Lettuce does with inventory for QuickBooks, or helps us accelerate our strategic direction around things like data sciences with Level Up.

And the acquisition you are referring to here around tax was basically a product that enables us to pull in PDFs and then electronically translate that into something we can import into a tax return so the consumer doesn't have to key in the information themselves.

That's all a part of our vision of moving from never enter data twice to never enter data at all, where what we call in tax, taxes are done. Basically, reducing the frictions required to key information in. Is there a blockbuster here? Boy, I hope so.

Good news is we're excited about all of them, but we've got to demonstrate this is gonna to change the trajectory of the company. But I have to say, I really love the fact that we've got a lot of momentum and a strong pipeline.

And these aren't best-of-farm kinds of acquisition in terms of their size, but they're adding extremely important capability around technology and talent that we're already starting to see an impact on the business overall. .

And our final question comes from James Bark [ph] from Senator Investment Group. .

In terms of competitive landscape, to what extent are you seeing 0 gain share overall in the U.S.? And then, Sage in Europe, to what extent do you feel like you're competing effectively against Sage? They seem you've had an extremely difficult time making the transition to the cloud, and I'm wondering if they're even much of a relevant competitive stretch to you outside of maybe the U.K..

.

Yes, James. It's good to have you on the call. And I'll start with competition overall. I think it's a good matter of practice to respect your competition, to understand what they're doing and to be very clear about how your different and how you plan to win. And so, just to put that out there, we have a respect for all of our competitors.

At the same time, we have a lot of confidence that if we play our A game, we continue to be the market leader, and we plan to do that. In the case of Xero, it's kind of hard to know how many customers they have right now. They're reporting their numbers. And so, I will let them do that. We see tens of thousands of customers in the U.S.

right now, and it's early days for them by their own admission. Just to put that into context, we added 63,000 net customers in this past quarter alone. And so, the size of our business in the U.S.

compared to theirs or the fact that we're accelerating globally from 90% growth last quarter to 130%, gives us confidence that if we continue to get the product right for the local markets and we continue to leverage our relationship with accountants, that we've got game. And we're very excited about that. Competition makes everybody better.

In the case of Sage, I think what you're talking about is an incumbent who's happened to make the move to the cloud. The good news for us is we began that journey in the late '90s. We've had an online version of TurboTax, of QuickBooks, our payroll businesses and so, we've continued to re-factor our technology and add smart acquisitions along the way.

And I think that we're up on our toes. I think Sage clearly has a new version of online. The question will be whether or not they can move fast enough, with the new players coming into the market, to compete. But again, I respect them, and I wish them well. But our goal is to put a few more points on the board than they do. .

And then just lastly, with regard to Sage. I know they've had very little success in the cloud outside of U.K. But to what extent are you feel like you're gaining share with them, against them in Europe or in U.K., in both the SMB market, and then in the accounting-focused market. .

Yes. I would tell you that we're focused primarily in the U.K. and Europe, as you know, and you just pointed out. Our acceleration of new customer acquisition and our sign-up of accountants in the U.K. is exceeding the forecast that we had put in place back in August. We updated the 4k path [ph] again in January, and it's ahead of that again.

So our momentum is building in the U.K. In terms of whether that's coming at the expense of Sage or it's new users, I don't have that level of information. We can talk more about that when we get to Analyst Day. But I can tell you that right now, our momentum in the U.K.

is extremely encouraging and, clearly, as the incumbent there, the real question is going to be, are they going to be able to keep pace? And that's going to be up to them to answer. .

And I'm showing no further questions at this time.

Gentlemen, would you like to close with any additional remarks?.

Yes, Sa-il. Just a couple of questions. I want to thank everybody for the questions. We are pleased with the result this quarter. We're laser-focused on the opportunity ahead. I can tell you the energy level in the company is high. We love this momentum to the cloud.

We fully appreciate that there's a current period trade-off as we move from a one-time purchase to a 12-month subscription. But we love the long-term prospects and the fact that the lifetime value is higher. We're going to continue to press forward to win this game in the cloud and we're looking forward to speaking to you again in the next quarter. .

Ladies and gentlemen, thank you for participating in today's conference. This concludes the call. You may all disconnect, and have a wonderful day..