Matt Rhodes - Vice President, Investor Relations Brad Smith - Chairman and Chief Executive Officer Neil Williams - Chief Financial Officer.

Walter Pritchard - Citi Keith Weiss - Morgan Stanley Kash Rangan - Bank of America Merrill Lynch Brent Thill - UBS Ross MacMillan - RBC Capital Markets Scott Schneeberger - Oppenheimer Michael Nemeroff - Credit Suisse Yun Kim - Brean Capital Nandan Amladi - Deutsche Bank David Togut - Evercore ISI Patrick Colville - Arete Research.

Good afternoon. My name is Latif and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit’s Third Quarter Fiscal 2016 Conference Call. [Operator Instructions] With that, I will now turn the call over to Matt Rhodes, Intuit’s Vice President of Investor Relations. Mr.

Rhodes?.

Thanks, Latif. Good afternoon, everyone and welcome to Intuit’s third quarter fiscal 2016 conference call. I am here with Brad Smith, our Chairman and CEO and Neil Williams, our CFO. Before we start, I would like to remind everyone that our remarks will include forward-looking statements.

There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2015 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 have reconciled the comparable GAAP and non-GAAP numbers in today’s press release.

Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period and the business metrics and associated growth rates refer to worldwide business metrics.

Also, all reported results and guidance, except GAAP, net income and EPS, exclude Demandforce, QuickBase and Quicken, 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 will turn the call over to Brad Smith..

Alright. Thank you, Matt and thanks to all of you for joining us. As you already know, we had an outstanding tax season. We are also pleased with our performance in Small Business. At the company level and our fiscal third quarter, we came in ahead of our guidance across the board.

And as a result, we are raising our revenue, operating income and earnings per share guidance for the year. Since tax is on everyone’s mind, let’s start there. We feel great about the product innovation that we delivered in TurboTax this year as well as the result enabled by that innovation.

As you know, there are four key drivers to our Consumer Tax business. The first driver is the number of returns filed with the IRS. The latest IRS data indicates that total returns were up about 1.5%. That was a bit stronger than we expected, so it was a modest tailwind.

The second driver is the percentage of those returns filed using do-it-yourself software. This season, the category grew nearly 6% versus the assisted category, which was up only slightly. This suggests that do-it-yourself software category gained more than a point of share again this year, driving more than 3 points of revenue growth for TuboTax.

The third driver is TurboTax’s share within the do-it-yourself software category. For the third consecutive year, we gained share within the category. In fact, this season, we gained more than 3 points of share bringing our total software category share to roughly 65%. And the fourth driver is revenue per return.

As you know, our goal is to grow customers faster than revenue, which yields a positive lifetime value payoff after tax situations grow more complex over time. Our strategy to gain share of the less complex returns continues to bear fruit, enabling unit growth of 12% overall, which was faster than our revenue growth of over 9%.

With that said, revenue growth for the segment far outpaced our original outlook of 5% to 7% at the beginning of the fiscal year. Bottom line, it was a very successful tax season for TurboTax. So what drove the performance? The answer is simple, an awesome, innovative product experience. But what’s behind the awesome experience is not so simple.

It is driven by deep data science and rigorous execution from a very talented TurboTax team. Now, we began this multi-year journey 3 years ago to re-imagine the tax breadth experience, in support of a brand vision of taxes are done. And this season, we began to really see it pay off.

We remain committed to continuing to invest and build on our competitive advantage, driving share gains for the category and for TurboTax. This season, our team more than tripled its pace of innovation, introducing over 20 new products improvement. We coupled this product innovation with a great demand generation campaign that really resonated.

It doesn’t take a genius to do your taxes. We made the complex simple, which when you get down to it, is what Intuit does everyday. Our seamless cloud-based experience drove increased mobile discovery and usage.

Our mobile app downloads were up 85% versus last season and the number of completed returns through the mobile app and through mobile browsers doubled. This year, customers snap 5 million photos of tax documents with mobile devices. That is up 4x greater than it was last year.

This represented 25% of all the documents imported into TurboTax, which save time and reduce errors while delighting customers. We also continue to re-imagine the entire product experience using data to help customers finish their taxes faster with increased confidence.

For example, we broke down the Affordable Care Act into simple questions and provided new confidence building features like explain why and smart look. These innovations helped reduce the tax spread time by 40% on average for our customers.

We also delivered an excellent customer care experience and continued to invest in security, working with the industry and the government to protect our customers and to reduce fraud. On top of all of that product improvement, we continue to focus on serving an important segment that we feel is underserved and overcharged, the Simple Returns segment.

Absolute Zero gives these taxpayers the most affordable option, a great product that cost them nothing. But Absolute Zero was just one of the reasons that we won this year. In fact, TurboTax gains share versus software competitors who matched the Absolute Zero offer and we even gained share at the end of season at full price.

All-in-all, TurboTax grew unit double-digits and expanded share. We also grew revenue more than 9% and we improved margin in an already very profitable business. This was simply a great season for TurboTax.

Now, let me shift to the ProTax business, which we recently re-branded as the ProConnect Group, given the strategic role this business plays in our ecosystem. The ProConnect Group supports both of our strategic goals to do the nation’s taxes and to be the operating system behind Small Business success.

In support of doing the nation’s taxes, we are doing just that. We grew individual returns about 1% in this business this year, which is faster than the overall assisted category group. New customers were a bit soft, but we did a nice job with retention leading to modest customer and return growth.

Looking ahead, we are focused on growing the ProTax business in ways that are less reliant on price. We are leaning into the cloud with Intuit Tax Online and we are innovating with new attach solutions, like refund transfer and e-signature. We have got some work to do to drive faster adoption in these services, but we are optimistic about the future.

The new name reflects ProConnect Group’s expanded efforts to support Small Business success. The more we connect our accountant customers with our Small Business customers, the more successful they all our and the healthier our ecosystem becomes.

For example, we know QuickBooks Online retention is 11 points better when a Small Business works with an accountant. So, we are tapping into our accountant network to make these connections. Nearly 600,000 QuickBooks Online subscribers are now linked to an accountant. That is up 70% versus last year.

This all nets out to a strategically important, highly profitable business, albeit with a slower growth rate than TurboTax with a Small Business group. Neil will talk more about our expectations in this business in a minute. With that overview on the tax side of the house, let’s transition to Small Business.

We continue to generate strong new user growth in our online ecosystem. Again this quarter, more than 80% of QuickBooks Online customers were new to the Intuit franchise and total QuickBooks paying customer growth remained healthy. Year-to-date, across desktop and online, new customers are up 16%, which is an acceleration from last year.

QuickBooks Online continues to build momentum. We grew total QuickBooks Online subscribers 45% in the third quarter. This resulted in the addition of 140,000 QBO subscribers in the quarter, bringing us to 1,397,000 paid subs worldwide at the end of April, which was ahead of our guidance.

Roughly, 75,000 of these QBO subscribers are using QuickBooks Self-Employed, which is up from 50,000 last quarter. Outside the U.S, QuickBooks Online grew roughly 60% to 255,000 paying subscribers. In total, we are executing well and we are on track to meet our subscriber targets for fiscal year 2016 and 2017.

Also it’s important to note that revenue per customer is coming in a bit stronger than we expected so far this year. As we said at Investor Day, we are expecting to land at 2 million to 2.2 million QBO subs at the end of fiscal 2017.

Now we are also improving customer retention and we fully expect retention to continue to improve next year as more of our QBO customers are acquired through or worked with an accountant. Attach of payroll payments and third-party apps also improves retention and we are building solid traction there as well.

For example, we now have over 100,000 QuickBooks Online Accountant customers who have at least three of their own clients on QBO. That’s more than double what it was a year ago. We now also have 2,500 third-party apps in our ecosystem.

That’s up from 1,100 a year ago and approximately 15% of QuickBooks Online customers are connecting to at least one third-party app. That’s up from 9% a year ago.

Payroll and payment as you know were drivers of retention and they also help drive revenue per customer and the attach rates for these products remain healthy at 19% per payroll and 8% for payments. So that’s the story of the high level.

Our teams have driven significant innovation across all of our offering and it’s resulted in strong financial results for the quarter and for the year. So with that, I am going to turn it over to Neil to walk you through the financial details..

Thanks Brad and good afternoon everyone. For the third quarter of fiscal 2016, we delivered revenue of $2.3 billion, up 8%. This growth reflects the shift of approximately $30 million of consumer tax revenue from Q3 into Q2 relative to last season.

We delivered non-GAAP operating income of $1.4 billion, up 11%, GAAP operating income of $1.3 billion, up 21%. Non-GAAP earnings per share of $3.43, up 20% and GAAP earnings per share of $3.94, which reflects an after tax gain of $0.67 per share on the divestiture of Quicken, QuickBase and Demandforce.

Turning to the business segments, total Small Business segment revenue increased 12% for the quarter. Small business online ecosystem revenue grew approximately 24% for the quarter as customer acquisition and our online ecosystem continues to drive growth. QuickBooks online subscribers grew 45%.

Online active payments customers grew 6% and online payments charge volume grew 18%. Online payroll customers grew 17%. Switching to the desktop side, total desktop ecosystem revenue increased 8%. QuickBooks Desktop units were up 3% in the third quarter and for the full year, we expect desktop units and revenue will be up slightly.

I know it’s been difficult to correlate the growth rate in QBO subscriptions to our online ecosystem revenue growth rate. Here are some details on online revenue that should help with your modeling. In the third quarter, online payroll revenue grew 21% and online payment revenue grew 13%.

About 40% of our online payroll customers are attached to QBO while 60% are not. We saw standalone online payroll through partners and accountants. This is a good profitable business, but one that grows much lower than payroll attached to QuickBooks online. The revenue mix is closer to 50-50.

We expect payroll customers attached to QuickBooks Online to grow around 25% this year and revenue from those customers to grow nearly 40%. Now let’s look at payments through the same lens. The customer and revenue mix for attached to non-attached solutions is about 50-50, but the story is a little different.

We are not currently focused on standalone payments channels, like GoPayment and online processing that are not attached to QBO. The QBO attach business is growing very fast and the non-attach business is shrinking. We expect payments customers and revenue attached to QuickBooks Online to grow more than 50% this year.

Consumer tax revenue was up 7% versus the third quarter last year. And for the year, we expect consumer tax revenue growth of approximately 9%. As a reminder, third quarter consumer tax revenue reflects the shift from the third quarter to the second quarter, primarily driven by an extra weekend day in January this year.

One thing I would like to call out as we start thinking about next season and next year’s guidance. We are investing to improve the total TurboTax product experience, thus delivering the results you saw this season. This remains a high margin business at over 60%.

We remain focused on growing customers, gaining share and increasing profit dollars rather than margin expansion. Our ProConnect Group, professional tax revenue was $126 million in the third quarter. For the fourth quarter, we expect ProConnect revenue to be approximately the same us in the fourth quarter of fiscal 2015.

As Brad said, we are focused less on price on the ProTax side and investing in our accountant offerings to enhance growth in the QuickBooks Online ecosystem. We expect revenue to be roughly flat in fiscal 2017 with margins remaining above 60%.

We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield an expected return on investment greater than 15% over 5 years. We have repurchased for $465 million of shares in the third quarter and we have $435 million remaining on our authorization.

Our cash investment balance was $1.6 billion at the end of the third quarter and our Board approved a $0.30 dividend per share for our fiscal fourth quarter payable on July 18. This represents a 20% increase versus last year. Year-to-date, we have returned nearly $2.5 billion in cash to our shareholders via share repurchases and dividends.

We provided guidance for the fourth quarter in our press release. We also raised our full year revenue, operating income and EPS guidance and now expect revenue growth of 11% to 12% for the year. We have reiterated our full year fiscal 2016 guidance for QuickBooks Online subscribers.

As we look forward to fiscal 2017, we are pleased that our trajectory is in line with the long-term customer and financial plans that we shared last year. Small business and consumer tax remain quite healthy. We will continue to invest in awesome products, security and customer care. The investments we are making outside the U.S.

will pay off over the longer term horizon. Taking all this into consideration, I still believe that $4.30 is the best estimate of where non-GAAP EPS will come in next year. We will share more when we provide fiscal 2017 guidance in August. And with that, I will turn it back to Brad to close..

Thank you, Neil. In a headline, we are having a great year. Customer growth is as strong as it’s ever been in small business and TurboTax and our accountant facing teams are driving adoption and health across the ecosystem. We are further penetrating large addressable markets and we remain deeply committed to accelerating customer and revenue growth.

Now before I close, I would like to share a few words about our dear friend, Bill Campbell. Personally and professionally, Bill’s larger than life persona, his colorful language, his brilliant and his leadership stretched from coast to coast.

Respected by all as the coach, his influence shaped men and women from football fields to corporate Board rooms and to his table at the Old Pro Sports Bar in Palo Alto, California. He was indeed one of a kind and well built can never be replaced, he will always be remembered. So with that, let’s turn it over to you to hear what’s on your mind.

Latif?.

Thank you. [Operator Instructions] Our first question comes from the line of Walter Pritchard of Citi. Your line is open..

Thanks.

I know you get this question a lot on desktop versus online, but I am wondering if you could maybe walk us through some of the factors that you saw in the April quarter that drove again growth in desktop and maybe online sub is a little lower than we were expecting, although pretty much spot on, just trying to understand is there anything new going on there as we got through the last three months?.

Yes. Walter, it’s Brad. Thank you. First of all, we would tell you the important thing to think about is that desktop and online are not a zero sum gain. In fact, what we are doing is we are expanding the total addressable market.

And I know that I have had a couple of shareholders ask me questions about the fact sheet we used to report years ago that included the number of desktop customers that run the last 3 years version. We don’t report that anymore.

And so there was a question of hey, is that number actually decreasing faster than online subs are growing and are you losing customers? So I will tell you what, we will share some information at this moment that actually is subs that we used to publish. So, everyone has got the same data.

If you take the total number of QuickBooks desktop customers and look at the ones that are on the last 3 years version, these are the active customers and then you add that to the online subscribers and the desktop subscribers, the total base is up 4%. That is the first time that base has grown in over a decade.

If you then take that number and say, how many actually paid us this year? They either bought a version of desktop in the last 12 months or they got a subscriber, subscription promise. That number is up 20%. And then if you look at total new users, whether they bought desktop or online, that’s up 16%.

So no matter how you cut it, the headline is we are expanding TAM. We are growing our base. We are entering new markets. And we feel very good that both the desktop and the online business are growing. And time to desktop, the thing that we discovered is what we talked about on the last call.

We have a group of customers that even with feature parity and even with pricing concessions do not want to move to the cloud right now either because their accountant isn’t yet in the cloud or the Small Business just likes the product the way they have it and they don’t want to make the move.

We want to make sure they remain active customers of Intuit and that they are buying payroll and payment services, so we want to keep them delighted. So, we are making sure that the desktop customers are happy. The cloud customers are happy. And that those who want to move over, we want to make it easy for them to do that.

So net-net, we have a very vibrant ecosystem right now. It’s growing in total. And the online subs for us, actually was right on our expectations. I felt great about 45% growth. I feel good about the momentum we have in the countries outside the U.S.

And most importantly, I love the facts we are expanding TAM, both new countries as well as self-employed, which give us a lot of runway for the future. So, that’s how we felt about the QuickBooks business overall..

Got it. It sounds like math shouldn’t have taken that automatically.

On the international side, could you just update us on how you are thinking about sort of customer acquisition costs versus kind of lifetime revenue in some of the international countries? It seems like to us, there is a varying degree of competition in some of the markets you have entered in the last year or 18 months?.

Yes, I can. As you might imagine, it’s a country by country story. So in each country, we have the different set of strategic outcomes. We fundamentally believe that certain markets right now we have a real advantage and we have momentum and we are going to invest to win in that market.

In other countries, we know that we are moving in and we are the second placed player. And so we want to be a challenger in that market and for every specific country, Neil and I have sat with the country managers and we have agreed upon an LTV to cap and it’s a multiyear target.

So, we actually have where should we be a year from now, 2 years from now, 3 yeas from now? In some cases, we pushed that number a little further out for strategic reasons. In other cases, we say we think we can get the profitability a little bit sooner.

But it truly as a country by country formula and make no mistake, we see a lot of upside and the number one focus we have is expanding TAM and accelerating customer growth, because we know lifetime value will come over time. We just want to mature we are doing that prudently with the right cost to acquire..

Okay. Thanks, Brad..

Alright..

Thank you. Our next question comes from the line of Keith Weiss of Morgan Stanley. Your question please..

Thank you guys for taking the question and very nice quarter. If I may, one question sort of on tax and one question digging in on the flipside of the equation. On tax, again, a very good year of market share gains.

As we think about sort of rolling forward, any reason to believe in terms of perhaps stuff that you saw from your competitors, structural things within the marketplace that these share gains shouldn’t be sustainable on a going forward basis, some pretty big numbers there? So, perhaps it’s just a lot of large numbers, but any reason that why we shouldn’t be extracting that on a going forward basis on the tax side?.

Okay.

And Keith, did you want to put your second question out there?.

Sure. So, I will put the second question out there as well. So, on the QuickBooks Online side of the question, if we just look at the numbers from face value of where you guys are expecting to get to at the end of FY ‘16 and then look at we are expecting to get to at the end of the FY ‘17.

It does seem like you need to see an acceleration in quarterly net sub adds into next year.

So, the question is are we looking at that right? And if so, what causes that acceleration sort of the bigger number of a quarterly sub adds into next year or are there other factors in play the improving renewal rates or the like?.

Got it. Thank you, Keith. First of all, thanks for the feedback on the quarter. Let me talk to tax first. The results you saw this year are the results of a multiyear investment we have been making in product and innovation, which is not easily matched by competition.

I mentioned a couple of things in my opening talk track that even though we had success with Absolute Zero, we also had success when competitors matched Absolute Zero and we were head to head and we took share and we also had success after Absolute Zero was done and we were at full price.

What’s happening right now was we are really making big advances towards taxes completely going away and having no friction for customers to get to the refund. And you heard me talk about this year on average customer spent 40% less time having to do their taxes. That is not stuff that competition can match.

Now at the same time, I will tell you we have a lot of respect for our competition. We don’t underestimate them when we know every year is going to be competitive. But do I believe that the same can continue to advance our product innovation and as a result, continue to win more customers and take share? I do.

That’s the expectation we have of ourselves and that’s the expectation we want to deliver for our customers as the product basically get them closer to taxes were done. So, said another way, I don’t buy the law of large numbers in our case. We are going to continue to work hard to get at that number.

The second is QBO an acceleration, you are right, for us to deliver the 2 million to the 2.2 million subs growth, you are going to continue to see an acceleration in terms of the net adds we bring in on a quarterly basis. We fully know that and we continue to reinforce our confidence in that.

And you may ask why? Well, remember, one of the things we talked about when we gave that forecast is we needed to have total subs growth on a 40% compounded annual growth rate. Well, this quarter was 45%. The second thing is, while we have made some adjustments outside the U.S.

and Canada and India, we have got a clear path of how to get those countries repositioned in a good way. UK and Australia are on fire and we just brought on two new countries, Brazil and France. And so we believe with the expanding TAM and the fact that were early innings in both self-employed and global as well as the fact that the U.S.

grew in the mid-30s, we see our way to the 2 to 2.2. We are not batting an eye and your math is correct, we think that is doable..

Excellent. Thank you very much, guys..

Alright, Keith. Thank you..

Thank you. Our next question comes from Kash Rangan of Bank of America Merrill Lynch. Your line is open..

Hey, guys. Congratulations on the tax numbers on the consumer side. My question is more on the QBO side, I would have granted that you guys have been putting up very good growth in QBO sub base, I would have thought that the attach rate of payroll and payments, which quite healthy at 19%, 8%.

But I would have thought that those businesses should be growing even faster and it’s little surprising, but your QBO based business, although it’s larger than payroll and payments, it’s actually growing faster and adding more new dollars than the other two businesses.

Can you help us understand when could we see that inflection point where the attach rate starts to inflect pretty materially that you could realize your growth objectives, which I am sure are pretty aggressive with respect to payments and payroll? It seems to me there is something limiting these attach rates from going potentially very high.

I am sure that you have thought this as much as anybody else, but I just wanted to get your perspective. Thank you..

Yes, Kash, thank you. I would say, first of all, at face value, the one thing we have to keep in mind is we have a growing base of self-employed customers on these QBO numbers. And so those self-employed customers by definition don’t have employees so they don’t need payroll.

And many times they are driving for Uber or somebody else and they don’t need payments. And so if you actually look at it on an apples-to-apples basis, our tax rate remains very healthy compared to where it was a year ago. At the same time, we do see opportunity to continue to improve the attach rate.

We are focused on first use, making sure we reduced the friction and the customer experience and continuing to get those services available outside the U.S. and the non-U.S. countries, which will allow us to bring that penetration and that attach rate up for the total base. So, you are correct, we do think that there is still opportunity there.

We are working on it hard. That one of the things you have to look at right now in the absolute numbers is keep in mind that last quarter, we had 50,000 QBO self-employed. This quarter, we have 75,000. And that number doesn’t come with payroll and payments opportunities today. And so that basically makes the attach rate put the way they do.

The other thing I would say about the ability to improve the revenue, the ecosystem in addition to attach is obviously, we have shared with you in the past, we have customers that come in that first year on a promotional pricing period.

When they hit the 13th month, that average revenue per customer for that unit goes up about 15% and we are going to have customers rolling off that promotional pricing period and that’s going to help us bring revenue up. The last piece I will add, so in addition to attach rates and moving off of promotional pricing is retention.

A year ago, we have been talking to you about attention in the low to mid-70s. We now talk to you on QBO about retention in the high 70s and starting to tickle the low 80s. And every point of retention adds the net 15,000 subs. And so that number is also a lever that we continue to improve and we have improved significantly over the last 12 months.

So those are the piece of cash, I know there is a lot of math in there. Those are the pieces that kind of lead us to the confidence we have in the actual online ecosystem revenue. It is attach rates. It is retention and it is rolling off the promotional pricing..

Got it. And it’s all very Adobe-esque and very positive. Brad, if I could sneak in one, what would be your longer-term objective for payroll and payment attach rates on your QBO ecosystem? That’s it for me. Thank you..

Yes. Kash, I appreciate the feedback and the compliment comparing us to our friends here in the valley. We have a lot of respect for them. This is one of those mindset things.

It’s hard to management to say what is the limitation, so we actually look the number of people that are paying, employees and saying we should have 100% of them that are using QBO. And how many are accepting credit card and we should say hey, we should have 100% of them.

We know right now about have of small business accept payments and so we think that number is a good aspirational goal somewhere between here and there is reality. But right now, I would hate to limit our potential by putting a number out there that our employees think is okay, the best we can be.

Payroll for us is typically we say about 40% to 50% of desktop customers. Since right now, our QBO feature functionality is a little more service oriented, I would somewhere in the 30 to 40 is a sort of the near-term, but I think over time, you are looking at half of the base using payroll as well..

Wonderful. Thanks so much Brad..

Thank you..

Thank you. Our next question comes from Brent Thill of UBS. Your question please..

Thanks. Brad, just on QBO, you raised the full year guide, but you reiterate your goal and I think there are a few investor questions about the deceleration of growth, especially outside the U.S.

where the growth rate is still obviously very healthy, but decelerating very quickly, so if you could just put that into context of your targets on QuickBooks Online where you feel like you are hitting, are you getting the stride that you would like to hit, you mentioned some of the reorganization in the process in India and in Canada, how long will that take to stabilize to help that base grow again?.

Yes. Brent, I would be happy to do that. I will start with, it was just a short time ago in the fall at Investor Day when we remove the original target of 2 million subs, which was the original outlook for 2017. And we raised it to 2 million to 2.2 million.

And we said hey, that’s a new your goal and that was about nine months ago, not even nine months ago. And then from there of course, we have been accelerating. And so to do that, we have to deliver 40% plus CAGR. And we have been above that number. And so we actually are achieving the outcomes that we set for ourselves internally.

Now along the way, we have had some learning. One was Canada, as you know we found out that we were selling units through retail and then they weren’t retaining at the levels we expected them to and so we shutdown that channel.

I would tell you that Canada pivot is now behind us and the momentum is rebuilding in Canada and we feel very good about the Canada outlook right now. The other area was India. And India is where we didn’t take the time to localize the product and get all the compliance features of the levels that accountants would have confidence to recommend it.

As a result, they were recommending our product in conjunction with another product and it was becoming a companion app. We did not want that to be the brand and so we have now stopped that.

We have actually been finalizing the product, localization and we are now starting to go direct to small businesses while we are getting back out to accountants and let him know the new version. That one is not as far along as Canada, but we are already seeing the progress in India as well. The last two are the new countries.

Brazil, which has now afforded its acquisition we did a year ago called ZeroPaper, reporting over on to QBO and we are starting to accelerate there. And then France, we just did general release. So when you put that together U.S. remained strong, self employed is opening a new market. Canada is back on track. India has made its turn.

Brazil and France are ramping up and UK and Australia remain gain busters. And so we feel good about our 2 million to 2.2 million. I understand there is a little bit if you have to have faith and confidence if you would just take a look at what we delivered so far.

But I hope that that we can demonstrate through the first quarter, the second quarter that we are going to be on track to deliver those numbers because we certainly feel good about them or we wouldn’t reiterate the guidance..

Okay.

And Neil, you got out to a really good start early on in tax, were you able to accelerate any investments this quarter that maybe you want to put in that you got more confident that you could put in given the trajectory of the tax business out of the gate?.

Brent, we have been testing product experiments all along the tax business. I can tell you we invested everywhere we saw a favorable payback. And you see that with the unit growth we have had this year. We didn’t leave any investment dollars on the shelf. You can rest assured with that. And we think as Brad said, this is a multi-year journey.

And so there are more things that we want to do next season and we made some investments this season, I think it will pay off next year as well..

Thank you..

Thanks Brent..

Thank you. Our next question comes from Ross MacMillan of RBC Capital Markets. Your line is open..

Thanks so much and apologies for the background noise. I am at an airport. Brad, I had a couple of questions, congrats from me on the tax season as well, great effort. I actually had two questions on QBO. The first is, when we look at the core U.S.

subs ex international and self-employed, the net adds has sort of flattened a little bit here in the last couple of quarters.

And I am just curious, as we think forward especially towards the 2 million to 2.2 million goal, would you expect that the core domestic sub adds would sort of reaccelerate again or I would love your sort of thoughts around that.

And then second question is, you had QBO announcement and we talked about the QBO, kind of importance of the accounting channel, maybe you could just restate the importance there, it sounds like it has implications for churn and other aspects here, so I would love to get your quotes or color there? Thanks..

Yes. Thank you, Ross. And no problem on the background noise, I know you are a busy man out there traveling and I appreciate you dialing in. Let me start with QBO for a minute, core U.S.

I think one of the things that we are working hard to help everybody understand inside the company and outside is last year, when we introduced QuickBooks self employed, we actually eliminated the low end SKU in QuickBooks Online, which was called QuickBooks Online Simple Start.

And so we always use account QuickBooks Online Simple Start as the core QuickBooks Online product lineup because there is a low end customer who quite frankly was over-served by that product. And we shut it down and replaced it with QuickBooks self employed.

So I think it’s a little bit of a misnomer to say, pullout self-employed and to tell us how the rest of QuickBooks Online is growing. But that would be similar to saying pullout TurboTax Deluxe and just look at the rest of the product lineup.

I think it is something we all have to get our head around is it is a part of our core product lineup and honestly, it’s expanding TAM. There is 30 million to 50 million people in that space that the original QuickBooks Self-Employed or Simple Start didn’t serve.

So I think that will be the first thing and I just want to make sure that you know that’s how we look at it. Now, when you back that out and say how is the QuickBooks Online for U.S. business growing what I would like about it is its doing exactly what we wanted it to do. It’s expanding TAM. So the desktop customers are still growing.

QBO, 80% of the customers are new to the franchise. They have never used QuickBooks or Accounting before. Self-Employed is going after a category that they could have never been served before with the old QuickBooks Online Simple Start and you put it all together and in the U.S.

that number is, without Self-Employed, growing in the mid-30s, which is a very healthy number. But if you add back in Self-Employed since we used to have Simple Start in there, the number is even better. So that would be the way we look at it in terms of core.

And I do think there is continued opportunity to keep that healthy above 30% and even potentially accelerate it as we get wiser about how to market the Self-Employed product. So that’s on the Self-Employed side. On the accountant side, you are actually right. This business is strategic.

We have known for years, two realities about to the accountants being involved in a Small Business choice. The first is the success rate of the Small Business goes up 89% if they work with an accountant. The second is over half of all accounting, payroll and payment decisions are made because the accountants influence them and told them to buy it.

So they are a tremendous decision-making advocate for our products. The third piece is the piece that we talked about today in the opening points. Yes, the accountant is working with the Small Business. The retention of QuickBooks Online goes up 1,100 basis points, 11 points and a point of retention is incredible for us in our subs business.

So, the importance of the accountant has never been more critical as we moved to FAS and we also think they are going to be catalyst to get a lot of these customers to adopt the cloud which is why we are leaning in so heavily with QuickBooks Online for accountants.

So, that’s one of the summary of the accountant side and I hope I also helped clear up a little bit about how we look at core QBO especially as it relates to Simple Start or Self-Employed, I am sorry, I got the old term in there, Matt.

Latif?.

Yes, sir. Our next question comes from the line of Scott Schneeberger of Oppenheimer. Your line is open..

Thanks. Brad, I have one multipart for you on TurboTax and then one for Neil. On TurboTax, you had mentioned on an earlier question, after you turned out Absolute Zero, you still grew very nicely on a relative basis.

Could you please elaborate on this year versus past years? And then just as the follow-on, could you elaborate on the ACA in the fraud dynamic this year and how you are looking forward to next year? Thanks. And then I will come back later with Neil’s..

Yes, Scott. Thanks for the question. In terms of elaborating on TurboTax, as you know, the full season and we picked up a little over 3 points a share.

As you look at it in pieces and parts sort of early season, what happened in the core season, why Absolute Zero was an offering and then what happened at the end of season when Absolute Zero stocks being offered by us, although one of our competitors continue to offer a version of it out there and we went back to full price.

We took equal parts share throughout the season. So, we didn’t have any variation that said, hey, this will hold the result of this.

And then you step back and say, well, what drove that? Well, when you look at it this year, the team put out 3x, three times more the product innovation than we did last year over 20 new product feature functionality and innovations where I put into the product.

And that was a really good campaign that I think resonated, where people really felt more self-empowered was what actually drove our competitor advantage this year. And so, that’s really the TurboTax piece. In terms of ACA and price, we have been pretty consistent on ACA. It’s just the next piece of legislation that’s been introduced by government.

The cause of people to say, this is complicated and our job is to say no, you are capable of doing it, we will make it simple. And we worked really hard for 3 years to do that and the Affordable Care Act has not been a headwind at all. In fact, it’s been one of the highest converting aspects of our website.

In terms of fraud, we will have a summit again in the summertime with the rest of the industry and the IRS Commissioner. But I think we all collectively feel good that we made big advances this year as an industry and we think that those advances will continue as we look ahead to next year and we remain committed to getting bad actors out of the U.S.

tax system..

Great. Thanks so much for that, Brad. And then, Neil, you alluded in prepared remarks that 430 still looks like the most reasonable shakeout points for fiscal ‘17 EPS. At Investor Day, you discussed some things that would drive you towards the low and the high end of the range.

Could you just somewhat address that and tell us how you are seeing each of those items progressing now that we have moved a couple of quarters since the Investor Day? Thanks so much..

Sure, Scott. I think the thing that this season has confirmed for us is that when we have an opportunity to increase our share and grow our customer accounts it’s a great way to grow our top line revenue and also our earnings per share, so just like we talked about back in August.

I think as we see opportunities to grow the top line more through customer acquisition, it tends to move us up and we tend to see move on the top side. We are looking to invest and make the product better every day both in Small Business and in Consumer Tax.

As you can imagine this time of year, we have a lot of ideas, lot of suggestions for ways to take advantage of that expanded addressable market as Brad mentioned and to grow the product faster.

We are running test and we are running experiments now to determine, which of those we think would have the biggest impact next year both in Small Business and in Consumer Tax. We consider the markets that we are in. We have talked about some adjustments we have made in some of our markets outside the U.S. already.

So, those are things that help us balance, Scott, between delivering what we consider is a very strong mid-teens improvement in EPS at the same time, while continuing to invest in the future to be sure that we have a good 18 to 19 after 2017.

So, that’s kind of the way we are looking to bounce it off for the balance of this year and see more about that when we give guidance in August in the Investor Day..

Thanks so much..

Alright. Thank you, Scott..

Thank you. Our next question comes from the line of Michael Nemeroff of Credit Suisse. Your question please. Mike Nemeroff, your line is open..

I am sorry, can you hear me now?.

Yes..

Thanks for taking my questions. You gave a lot of detail specifically around the blended retention rate. I was curious if you could maybe break out the retention rates or give us a sense of the retention rates, the differences between the different subscribers and QBO, the U.S, the international and specifically the SE since its growing so fast.

And then on the delta in the contribution between a QBO sub and the desktop customer, I am curious how many years do you anticipate before there is parity between those two customers in the future?.

Okay, Michael. I will take the first one and have Neil jump in and help on the second one. We are pretty guilty of sharing lots of facts and factoids and our fact sheet is pretty rich. One of the things we haven’t shared at this point is breaking out the retention rates for different SKUs in QuickBooks Online.

We don’t tend to do that for the other product lines either, so, QuickBooks Online Self-Employed versus its bigger bothers and sisters in U.S. and non-U.S. I can tell you what we did talk about, which is we began the year in the low to mid 70s and we are finishing up the fiscal year with retention in the high 70s.

That’s pretty significant improvement in a 12-month period and we see opportunity to continue to improve that as we go into next year. But unfortunately, we aren’t breaking out at the level that you would like to hear it today and over time, if we think that becomes more meaningful and material, then we will consider doing that.

And Neil, the second question was QBO subs and desktop?.

Yes. On the average revenue per user, Michael, there is a pretty big gap right now. We talked about around $425 a year for the U.S. subscriber versus something around $125 a year for a subscriber outside the U.S. And what we said was we clearly expect to see that revenue per user growth for each one of those segments.

And as Brad mentioned in the script, that’s certainly our experience so far this year, but we don’t see that gap actually closing and we don’t see a QBO subscriber outside the U.S. getting to the same average revenue per user we see in the U.S. for a considerable time period.

We don’t really have the payroll and payments attach opportunities that you see in the U.S. outside the U.S. And that’s where a lot of the revenue comes from as you well know. And so we think that disparity is going to exist for a while.

Are you speaking of online primarily or are you thinking of desktop?.

Both actually, but that answers the question. Thank you very much..

Okay, thank you..

Thanks, Michael..

Thank you. Our next question comes from Yun Kim of Brean Capital. Your line is open..

Hey, Brad. On the QBO payroll and payment attach rates, can you just talk about what efforts are being made to improve the attach rates for existing QBOs rather than focusing only on the new QBOs.

So, if you take out the QBO Self-Employed, are the overall attach rates for QBO subs improving?.

Yes. So, let me just start with the second part of the question first. If you back out the Self-Employed and the non-U.S. QBO subs, I am looking at Matt and Jerry, I know we had done some math on that and I believe the answer is they are a little bit year-over-year. So, thank you for that. We got so many different pieces of math here.

The second piece was then what are we doing in addition to new. And the good news is with someone is coming in and making an accounting decision the best time to get them signed up for payroll and payments is in that first 90-day window, but that doesn’t mean we can’t go back and continue to drive penetration into the base.

And at FAS product you are able to do that, you are able to do that with special offers, you are able to do that moment of truth sort of pop-ups and things that will say, hey, you decided another employee, which is like to sign up for payroll services.

And just as we are learning in TurboTax, we can use machine learning and data science to look for more creative ways to expose them to these kinds of offers. And so I have to tell you, TurboTax has been leading the way and using data as a way to attach products and services.

And we are now bringing that same level of rigor to the QuickBooks Online team and we are trying to use that as a way to improve the attach rates for payroll and payments as well.

We are early days, but we think there is a lot of opportunity there and we feel the same way many of you and this call have, which is it looks like a lot of upside there or you are going after aggressively and our answer is yes, we are and we agree. We have a lot of opportunities to continue to improve..

Okay.

And then just on that QuickBooks Desktop unit sales has been pretty resilient over the past several quarters, I think last quarter, you talked about some pricing was driving some of that resiliency, when can we expect that unit sales to kind of go back to like double digit decline versus right now it’s been pretty strong?.

So far Kim, I have been wrong on every desktop forecast we have made, because one of the things that we assumed was that that customer behavior was predictable based upon what we saw in other product lines, like TurboTax and desktop and it’s not. What we are seeing right now is there is a very delighted group of QuickBooks Desktop customers.

And when we try creative things like raising the price on them lowering the price on the cloud, getting feature parity, that didn’t move them while it did cause them to delay purchasing the newest version of QuickBooks Desktop. So then, we went back and we tested some pricing promotions, it’s not an everyday low price.

We did advertise at the price that it used to be before we raised it and sure enough those customers went out and bought the newer version of QuickBooks Desktop. So the good news is they are staying with us. They are not going anywhere and they are not hurting QuickBooks Online subscribers.

So really, what we are doing now is we are making sure that we keep those customers happy. We continue to expose them to attach services like payroll and payments and we continue to let them know that there is a file based version that’s great for them, should they ever decide to move.

But our hope right now is that we keep them in the franchise regardless of which product they choose..

Okay, great. Thank you so much..

Alright. Thank you..

Thank you. Our next question comes from Nandan Amladi of Deutsche Bank, your question please..

Thank you. I am at the airport as well, so pardon the background noise.

So I was going to ask about the BDO partnership that you announced yesterday, can you put that in the context of the ProAdvisor networks you have and what segments and geographies this video partnership was intended to do and what your expectations are for revenue contribution?.

Great Nandan. Thank you for the question. As we talked a few minutes ago, accountants are critical. We have had the program for years called ProAdvisor.

In the last couple of years, as we leaned into the cloud, we put a cloud-based set of services together for them, but it includes QuickBooks Online for accountants and a lot of other value added services. I have mentioned the fact that we have 600,000 of our customers now that are linked to an accountant and that’s up 70% from last year.

And this announcement that we announced yesterday at BDO was just another example of we are working with accounting firms of all sizes. Not just the independent firms, also the ones that buy our ProSeries and Lacerte product to do taxes and also larger firms like BDO.

At this point in time, we are working together to come up with a set of goals that we think are realistic in the first year as we get their firm strained and get them prepared to be good consultants for QuickBooks Online. So we haven’t announced any public goals.

I can tell you, we are very excited about the partnership, the world class firm, it’s very relevant to the customers that we serve and we think it will be value added for their firms as well..

Thank you..

Alright. Thank you..

Thank you. Our next question comes from David Togut of Evercore ISI. Your line is open..

Thanks for taking my question.

Brad, you talked about promotional pricing rolling off for QBO, can you help us think about fiscal ‘17 and fiscal ‘18 pricing both for QBO and TurboTax, what should we expect on a year-over-year basis, sort of apples-to-apples unit price?.

Yes. David, we want to be vary as sharing any of our pricing decisions too far in advance, because obviously we have competition that would love to know the answers to these questions.

But that being said, we have a tailwind and our tailwind is as you know, we offer a promotional discount in the first 30 days or sometimes the first 90 days for someone to come into QuickBooks Online. They will begin to use it for free, then they will get a discount of like 30% then they work their way at the full price.

And imagine the large base of net adds we have been putting in that will anniversary off of that as a 13th month and then will basically become full price at a roughly $24, $25 a month. And we have a nice tailwind of that base, it’s going to be rolling off that promotional pricing.

So what you should expect in ‘17 and going into ‘18 is continuing improvement in average revenue per customer. Now this is where Neil answered a few minutes ago comes into play. We have got three cohorts of customers. We have QuickBooks Online U.S, QuickBooks Online non-U.S. and of course the mix effect of QuickBooks Self-Employed.

All of those are actually getting stronger every 90 days in terms of average revenue per customer. But depending upon which one of those grows the fastest you can actually bring the blended mix down a bit. But we would tell you.

We look at it on a marginal contribution basis for each of those cohorts and all of them were getting better and will continue to get better in ‘17 and ‘18..

Thank you, that’s very helpful.

Just a quick follow-up, you had mentioned that you had essentially equivalent functionality at this point between QB Desktop and QBO, is the functionality for manufacturing customers, which I think is about a third of the QB Desktop base, particularly advanced job cost and advanced inventory management, you have equivalent functionality for those customers now on QBO versus QB Desktop?.

Yes. David thanks for the question. And I didn’t mean to suggest we had 100% feature parity, because we don’t. We are still in that 70% plus range. We just made some decisions last week to continue to invest in building out feature parity to get it at the premiere and eventually the QuickBooks Enterprise level that will be a multi-year journey.

But I will put in the context for you, no, we don’t have those advanced inventory capability today. We have foundational inventory, which is different than it was 6 months ago and it’s getting stronger everyday, but it’s not advanced yet. We don’t have the job costing in there yet.

But I think it’s important for us to kind of think about of the 3.5 million desktop customers we have today, 2.5 million do have feature parity. 2.5 million could move over tomorrow if that was the only decision they were waiting on.

And as we know, we have moved about 100,000 over to the first three quarters of this year, that’s up 22% last year, but that’s not 2.5 million. So, we are going to continue to build up feature parity. We think that’s important for the long-term.

We are going to continue try to get the accountant to encourage the desktop customer to look at the cloud and we will continue to do things like promotional pricing. But I think at the end of the day, we just got to get that Small Business comfortable that it’s good to be in the cloud and I think that’s just going to be a matter of time..

Understood. Thanks so much for the helpful detail..

Alright, buddy..

Thank you. Our next question comes from Patrick Colville of Arete Research. Your question please..

Hi, there. Thank you so much for taking my questions.

Can I ask you about the profitability in the Small Business segments really nice uptick there that was notable? And some color on whether that was assumed by the desktop business or whether there is some moving parts in online that are worth highlighting to us?.

Patrick, this is Neil. I think that the big thing you are seeing there is the impact of the ratable accounting change we made last year that has some impact on this year as well.

The overall business unit contributions in the segment, if you take that into account, have been in the low 40s, high 30s and that’s where we are out to be and where we expect it to be.

I am sorry?.

And then, I mean, looking forward to next year, the way that I am modeling out to get you full $1.30 EPS estimates, I think you guys will need a quite aggressive continuation in profitability in the Small Business segment.

Is that right? And if so, what are the levers that I can expect you guys to pull on to achieve that?.

Well, I mean think about, Patrick a couple of things. On the plus side, we definitely continue to see improvements in average revenue per user and growth in customers. This is also the side though where we have opportunities to grow and expand to invest in the markets where we are already entering the space.

But whereas Brad said, we are not the number one player. And we may consider additional markets next year. So, this is a great area, where we have big opportunities to drop revenue and increase revenue in the short run, but also big investment opportunities that don’t pay off in the short run either.

So, we are balancing those two things in our planning process for a multiyear profit plan to be able to generate good cash and good profitability in the short run, but make sure that we are investing for the long haul too. So, that growth is sustainable and accelerating beyond 2017..

Go ahead, go ahead. Thank you so much and well done on a brilliant three months..

Thank you, Patrick. Take care..

Thank you. And gentlemen, I am not showing any further questions.

Would you like to close with any additional remarks?.

Yes, I would, Latif. I want to thank everybody for the questions today. As we are entering the final stretch of our fiscal year, we feel like we are building some really strong momentum. Our strategy is working. The innovation we are putting under our products is not easily replicated and matched by our competitors.

And we are still on the early innings of penetrating this large and growing total addressable market. So, we are excited and we are looking forward to talking to you again soon. And until then, everyone, have a good day. Take care..

Ladies and gentlemen, thank you for participating. This concludes today’s conference call..