Intuit Inc. (NASDAQ:INTU)
Q2 2015 Earnings Conference Call
February 19, 2015 4:30 PM ET
Executives
Matt Rhodes – Vice President-Investor Relations
Brad Smith – President and Chief Executive Officer
Neil Williams – Senior Vice President and Chief Financial Officer
Analysts
Brent Thill – UBS
Greg Dunham – Goldman Sachs
Walter Pritchard – Citi
Sterling Auty – JPMorgan
Ross MacMillan – RBC Capital Markets
Kartik Mehta – Northcoast Research
Raimo Lenschow – Barclays
Brad Zelnick – Jefferies
Gil Luria – Wedbush Securities
Kash Rangan – Merrill Lynch
Jim Macdonald – First Analysis
Scott Schneeberger – Oppenheimer
Jennifer Lowe – Morgan Stanley
Michael Millman – Millman Research
Operator
Good
afternoon. My name is Sayeed and I will be your conference facilitator.
At this time, I would like to welcome everyone to Intuit’s Second
Quarter Fiscal 2015 Conference Call. All lines have been placed on mute
to prevent any background noise. After the speakers’ remarks, there will
be a question-and-answer period. [Operator Instructions]
With
that, I would now like to turn the call over to Mr. Matt Rhodes,
Intuit’s Director of Investor Relations. Mr. Rhodes, you may begin.
Matt Rhodes - Vice President-Investor Relations
Thank
you, sir. Good afternoon and welcome to Intuit’s second quarter fiscal
2015 conference call. I am 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 2014 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. 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.
Brad Smith - President and Chief Executive Officer
All
right, thank you Matt, and thanks to all of you for joining us. It has
been an eventful few weeks at Intuit and I suspect you have lots of
questions. Before we get to your questions, I would like to provide as
much context around the recent events as possible while keeping the
bigger picture in mind. The bigger picture is straightforward. Our
financial results are strong through the first half of fiscal 2015 and
we are reiterating our guidance for the full fiscal year. Furthermore,
our small business momentum has taken a step rate change in a positive
direction.
The growth in our QuickBooks Online subscriber
continuing to accelerate at a very healthy rate. With that said, I know
the tax is on everybody’s mind, given the time of year and the recent
press coverage. So let me start there first. At the highest level, our
tax strategy is on track. We are in the second year of a multiyear
journey to achieve our product vision of taxes are done.
This
year’s TurboTax significantly expanded its data import capability.
Nearly 75% of customers can now digitally import W2s directly into the
product that is up from less than 30% last year. This is a huge step
towards our vision if taxes are done, making tax spreads easier and more
accurate and this has led to several points of improvement and
conversion for customers who choose to import their data.
The
TurboTax experience now uses more advanced data driven insights to
tailor the interview to your unique situation. We refer this as
responsive experience and is saving significant time and questions off
of the average taxpayers preparation experience. In addition, TurboTax
users can now seamlessly move across platforms, working online on
tablets or on smartphones with the ability to start, stop and continue
their taxes on the device of their choice.
And for the first time
ever Americans with more straightforward tax needs were able to file
both their Federal 1040A or 1040EZ returns as well as their state
returns for free. This was a powerful offer for this 60 million
Americans, many of whom with paycheck-to-paycheck and count on their tax
refund as being the biggest paycheck that they will receive in the
year.
The collective impact of these innovations is showing up in
the customer experience. So far this season, our ability to convert
those who visit the TurboTax.com website and to those who file a return
is up a couple hundred basis points. This improvement is on top of a big
advance in conversion that we drove last year as well.
Our net
promoter scores for TurboTax Online are also up about a half dozen
points, which is quite encouraging. This improved product experience is
helping reduce customer care calls, which were down roughly 20%
year-over-year. And when it comes to the Affordable Care Act, we worked
hard to ensure that all tax payers could easily and accurately meet the
new ACA requirements with TurboTax.
Unlike some other tax
services, TurboTax includes all the necessary healthcare forms for free.
We don’t see any evidence that ACA is driving TurboTax customers to
other tax prep solution. In fact, the ACA section of our product has
been one of our highest converting tax topics this year, which gives us
confidence that our ACA implementation is meeting our customers’ needs.
Translating
the sum total of these initiatives, total TurboTax units grew 11%
through February 14 versus the comparable prior year period. TurboTax
Online units are up 19%, while TurboTax Desktop units are down 7%, which
takes to me the recent events of the past few weeks, which has not been
our best in terms of customer confidence. There were no excuses when
you make a mistake and we owned our mistakes and taken steps to make
things right. At the same time, we’ve been at the forefront of the
ongoing battle to fight fraud in the U.S. tax system, navigating lots of
misinformation along the way.
Let me share some important context
around both of these events. First, let me address the change to the
TurboTax Desktop product lineup, which we subsequently reversed. We
didn’t live up to our customer expectations and our net promoter scores
are down for the TurboTax Desktop product as a result. So why do we make
the change in the first place and what have we learned from the
experience.
I don’t need to tell anyone on this call that we are
in the midst of a massive platform shift of the cloud, and every
established technology company is dealing with the balance of serving
customers on legacy products while advancing their efforts and serving
new customers on the next generation platform. It’s no longer a desktop
software world. Our computers no longer come equipped with optical drive
and shelf space allocated software is down 50% in retail stores over
the last five years. But that said, a subset of customers simply do not
want to move to the cloud. Many of these are long-term loyal customers,
who have used the same product for 20 years, which is why we've always
been steadfast in our position that we won’t push a software delivery
model on a customer.
With that context what happened? Well, last
year, we had moved to a complexity baseline up in our TurboTax Online
portfolio, steering customers to the best offering for their particular
tax situation. This included moving Schedule C, D, E, and F from the
looks into our premier and our home and business solution. These are the
schedules that enable to file or to report items such as investment
gains and losses and small business expenses.
Our goal was
simplification. So customers were clear, which product was right for
their particular tax needs. For over 20 million online customers last
year, the implementation went smoothly. So this year, we thought to
complete the alignment by making similar changes to our desktop
offerings. Our goal was to streamline product development and bring any
new innovation from our online product back to our desktop customers as
well. And for those who might eventually choose to migrate to the cloud,
they would enjoy a consistent and familiar product experience. Good
intensions but misinformed.
These loyal long-time desktop
customers simply didn’t want a different product experience. And they
certainly didn’t want to have to upgrade and pay a higher price for the
functionality that they have always had in the looks. In addition, we
didn’t make the communication clear enough and we didn’t make the
transition easy. For the 3% of TurboTax customers who were affected, it
was simply unacceptable and they were right.
So here is what we’ve
done. Following a very public and heartfelt apology, we announced that
next year, we will offer the TurboTax to looks Desktop software that our
customers know and love, restoring all the forms that they've counted
on for years. Returning Deluxe desktop customers who need to upgrade
this tax season are now able to do so seamlessly within the product for
free.
More importantly, what lessons did we learn? First, know the
customer. We're a customer back company and we didn't effectively apply
our own expertise to this situation. Second, ease to transition; if
you're going to make product changes, make sure you have early dialogue
with the customers and make the transition slowly. And finally, act
quickly and decisively. When you hear noise, assume smoke means fire and
jump on the situation fast.
Which takes me to the more recent
news surrounding the concerns of increasing fraudulent activity in the
U.S. tax system, particularly at the state level. As we have shared on
many occasions, the privacy and security of our customers’ data is the
top priority in our Company. We've been working for years to apply the
most advanced technologies and techniques to ensure the safety and
privacy of our customers’ information and we have been doing this in
conjunction with the overall industry and with government as well.
I
was just in Washington three weeks ago, giving a key note to more than
100 policy leaders on this very topic. In more recently, Intuit and some
states saw an increase in suspicious filings. As a result several
states communicated their intention to stop accepting TurboTax e-file.
So we took the precautionary step on Thursday, February 5th to
temporarily pause the transmission of e-file state tax returns for all
states.
After our preliminary examination of the recent activities
with the help of a third security expert was concluded. We believe and
we continue to believe these instances of fraud did not result from
security breach of our systems and the information being used to file
fraudulent returns was obtained from other sources outside the tax
preparation industry.
We implemented targeted security measures to
combat the type of fraudulent tax activity that we were seeing. These
additional steps included the implementation of more advanced
multi-factor authentication, which is a proven technology for protection
against identity theft. With these measures in place, we resumed
e-filing with the state the next day. Once, we felt comfortable that our
customers’ privacy and security were not at increased risk.
And
we're continuing to work with the state as they build their own
anti-fraud capabilities and we will continue to share best practices as
we work towards the common best interest of the taxpayer. To assist any
customers, who are victims of tax fraud, we’re providing a dedicated
toll free number with direct access to specially trained identity
protection agents, who will provide comprehensive support and filing
assistance. So to summarize consumer tax, the underlying health of the
business and the product innovations that we're delivering are having a
meaningful impact on the customer experience and on our result season
today.
With that said, we suffered a self-inflicted wound on the
desktop line-up situation, and we are leading the battle against an
industry wide threat of cyber fraud targeting the US tax system. And all
of this happened within the first few weeks of a 100 day tax season.
But there is plenty of time left on the clock and if you look at the
scoreboard so far, you'll see that the IRS data through February 6th
shows that self-prepared e-file growth was up 70%, contrasted with
assisted e-files down 4%. This leads us to believe that the
do-it-yourself software category continues to gain share.
TurboTax
e-file growth and other third party data also indicate that we’re
gaining a couple points of share so far this season. So we’re keeping
the bigger picture inline and we’re going to emerge from both of recent
situations wiser and even more focused. Which takes me to the pro-tax
side of the business, where we’re seeing positive early trends and
customer acquisition. In addition, we’re delivering more innovation in
pro-tax than I have ever seen in my time at Intuit.
We provided
tools and training for our pro-customers to manage the ACA situation and
to help their clients achieve the best possible outcomes. We’ve
refreshed TurboTax Personal Pro, which we used to call CPA Select, and
we expect the new interface and the accountants’ engagement tools to
drive growth. We’ve launched Intuit Link, a data and document
collaboration tool for accountants that save time and simplify the
accountants to client communication and we’ve enabled eSignature
capabilities that help accountants streamline their work and securely
transmit signatures on important forms.
I realize that I don’t
need to remind anyone that it’s early in the season for both of our tax
businesses, but I will. We’re staying agile and I am very pleased with
our products and our pace of innovation. We’re focused on improved
execution and delivering for our customers and shareholders for the
remaining season.
Now, let’s talk small business. As I
foreshadowed earlier, the QuickBooks Online ecosystem continues to build
strong momentum. We grew total QuickBooks Online subscribers by 50% in
the second quarter that is up from 43% growth last quarter. We added
100,000 QBO subscribers quarter-over-quarter and we now have 841,000
paying subs worldwide. Outside the U.S. QuickBooks Online subscribers
were up more than 170% to a 127,000 in line with last quarter’s rapid
growth. Our QuickBooks Online customers continue to add payroll and
payment solutions at a healthy clip.
In the U.S., our new customer
online payroll attach rate was 21%,. This is a step down from roughly
30% last quarter, but it’s due to a change from an opt-out payroll
signup to an opt-in. We expect our attach rate to be in the low 20s over
the next few quarters but we expect to see improvements in retention as
a result of this change. Our online payments attach rate was 8%, which
is up from 7% a year ago.
To help fuel our international growth,
we made two acquisitions in the past quarter that will add key features
and functionality to the QBO ecosystem and targeted geographies. In the
UK, we acquired Acrede, a provider of payroll solutions with global
compliance and data security. They are easy to use cloud technology can
be customized to deliver payroll across multiple geographies. We also
acquired ZeroPaper, a developer of fast and mobile financial management
tools for entrepreneurs and micro businesses in Brazil.
In
addition to these acquisitions, we launched QuickBooks Self-Employed,
designed specifically for the rapidly expanding population of
freelancers and independent contractors. As you may recall, there are
roughly 12 million of these businesses in the U.S. Our QuickBooks
Self-Employed Solution helps the smallest of small businesses, manage
their finances throughout the year, and provides integration with
TurboTax to simplify tax reporting.
These sole proprietors
generally don’t see a need for all the functionality and traditional
QuickBooks online. They simply need to keep their personal and their
business expenses tracked and separated for tax time. This product is
gaining real momentum and I’m excited about the partnerships we recently
announced with Stripe, Uber, Lyft, TaskRabbit, and others all centered
around this particular market. We’ll continue to add partners to expand
our presence in this rapidly growing on-demand services marketplace. So
in total, it’s been an eventful first half of the year and it has been a
strong first half as well.
I’m inspired by our team’s commitment
to overcome obstacles, while continuing to reimagine the tax prep
experience in both our consumer and our pro-tax businesses and you’re
going to see much more innovation from these teams over the next few
years. On the small business half of the house, our small business
subscriber growth is accelerating and we remain focused on global
customer acquisition, all being powered by cloud-based services.
With that overview, I’m going to turn it over to Neil to walk you through the financial details.
Neil Williams - Senior Vice President and Chief Financial Officer
Thanks,
Brad. First, I'll start with overall company results, which all came in
higher than our guidance. For the second quarter of fiscal 2015, we
delivered revenue of $808 million, up 3%, a non-GAAP operating loss of
$20 million, a GAAP operating loss of $98 million, a non-GAAP loss per
share of $0.06, and a GAAP loss per share of $0.23. These factors
reflect our strategic decision to deliver ongoing services and releases
for future desktop offerings. As a result, revenue for future desktop
software licenses will be recognized as services are delivered rather
than up-front.
As we discussed previously, approximately $400
million in revenue will move out of fiscal 2015 into later years. The
impact and quarter seasonality of this shift varies by business unit.
The business with a shift is hardest to understand from an external
perspective is probably professional tax. I’ll provide some data to help
with modeling of the pro-tax business in a moment.
Turning to the
business segments. Total small business group revenue declined 1% for
the second quarter. Again reflecting the impact of changes to the
desktop product resulting in ratable, rather than up-front revenue
recognition. QuickBooks total paying customers grew 20%. Small business
online ecosystem revenue grew 26% and customer acquisition in our online
ecosystem continues to drive growth. QuickBooks online subscribers grew
50%, accelerating from last quarter’s growth rate. Online payroll
customers grew 23%, online active payments customers grew 3%, and online
payments charge volume grew 20%, driven by an increase in charge volume
per customer. Payments customers attached to QuickBooks Online grew
over 90%. We’re focused on growing payments in the QBO ecosystem while
de-emphasizing other services such as standalone GoPayment’s customers.
Rounding out the online ecosystem, Demandforce customers grew 18%.
Our
primary goal is converting non-consumption to capture a larger share of
the 29 million small businesses in the U.S. and millions more around
the world. To do this, we’re leaning into QuickBooks Self-Employed which
is part of our QuickBooks Online lineup as – and is included on the
QuickBooks Online Subscriber line on the fact sheet. We had
approximately 4,000 QuickBooks Self-Employed paying subscribers at the
end of the second quarter. We’ll continue to call out the growth of this
subscriber base over the next few quarters.
Moving to the desktop
ecosystem, QuickBooks desktop units declined 26% in the second quarter
as we continue to emphasize QuickBooks Online. More than 80% of our new
QuickBooks Online customers are new to QuickBooks rather than migrating
from desktop. Within the consumer group, consumer tax revenue was up 54%
versus the second quarter last year as we benefited from an earlier
start to the tax season this year. As you may recall, last year IRS
opened e-file on January 31, pushing revenue into our third fiscal
quarter, so this year we’re returning to a more normal seasonal pattern.
Our
strong unit growth today benefited from our Absolute Zero Promotion,
and our paid mix was also a bit better than we expected. In the back
half, we face a tougher compare, but we still expect units to grow
faster than revenue for the season. ProTax revenue was $11 million, down
69%. As we previously discussed, we expect a revenue shift of $150
million from fiscal 2015 to fiscal 2016 due to changes in our desktop
offerings. To help with your modeling, we expect ProTax revenue of about
$125 million in the third quarter of 2015 and about $100 million in the
fourth quarter.
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%. With
approximately $1.4 billion in cash and investments on our balance sheet,
our first priority is investing for customer growth. We also look for
inorganic opportunities, and in the second quarter, we competed two
acquisitions, bring us to a total of four transaction so far this fiscal
year, totaling approximately $90 million.
We’ve also repurchased
$555 million of shares in the second quarter with about 1.2 billion
remaining on our share repurchase authorization. We intend to be in the
market consistently during the year. Our board approved a $0.25 per
share dividend for our fiscal third quarter, payable on April 20th. This
represents a 32% increase versus last year and reflects our large and
growing cash position as well as more recurring and predictable revenue
streams.
Looking ahead, we have reiterated our financial guidance
and raised our QuickBooks Online subscriber guidance for fiscal 2015. We
also provided guidance for the third and fourth quarters and you’ll
find our guidance details in the press release and on our fact sheet. As
a reminder, we will provide our next tax unit update in April, soon
after the tax season ends.
And with that, I’ll turn it back to Brad to close.
Brad Smith - President and Chief Executive Officer
All
right, thanks Neil. I know we’ve taken sometime here to cover a lot of
turf, but I hope it’s been helpful context in advance of your questions.
We have a lot of opportunity in front of us and at the end of the day,
it all comes down to great people and I like what I see in our company’s
culture and in our employees. It is truly my privilege to be able to
serve alongside them each everyday.
So with that, let’s open it up to you to hear what’s on your mind, Sayeed?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Brent Thill from UBS. Your line is open. Please go ahead.
Brent Thill - UBS
Good
afternoon. Brad, on the tax side, you mentioned the conversion rate
went up year-over-year. I’m just curious if you could give everyone a
sense of what that conversion rate is today and what do you think you
can do to continue to drive those conversion rates going forward?
Brad Smith - President and Chief Executive Officer
Yes,
Brent, thanks for the question. First of all, we would like to wait
till the end of season and then at Investor Day we will share with you
the year-over-year comparison and conversion rates and one of the
reasons we want to do that is we’re getting better every week. One of
the things I mentioned in the opening remarks is the responsive
experience, which is our ability to actually look at the kinds of
information that we can see in your tax return and compared to others
like you and truly streamline the interview process. And so that’s
enabling us to get more conversion out of people who are coming in and
starting to return and getting them all the way through the end where
they actually hit the send button.
The other thing that we’re able
to do here is we’re looking for areas where there were historical
problems with entering data and then with the electronic import
capabilities that we continue to advance. We’re getting a lot of that
work done for you so reduces friction and it is a combination of those
things, which we call the taxes are done, which is really improving our
conversion and I will tell you the teams truly are making improvement
week over week and we will see how we finish up the season.
Brent Thill - UBS
Great.
And just real quick for Neil, given some of the renewed focused on the
cyber issues that are going on in the industry, there is certainly been a
lot more investments that the companies have been having to make to
protect themselves. I would assume given you haven’t changed the year on
the bottom line that many of these increased investments around the
cyber trend there are included in your guidance?
Brad Smith - President and Chief Executive Officer
Yes,
Brent, clearly that is a very important issue for us and so we are
providing all the funding that we need in those areas. Anything that was
not included in our guidance for the full year, we expect to reallocate
from other investment opportunities within the company. So we have
given a lot of thought and consideration, before we reiterated guidance
for the full year.
Brent Thill - UBS
Thank you.
Operator
Thank you. And our next question comes from Greg Dunham, Goldman Sachs. Your line is open. Please go ahead.
Greg Dunham - Goldman Sachs
Hi,
yes. Thanks for taking my question. One more on tax, I mean clearly the
numbers surprised as to the upset, especially given some of the bad
press that we’ve seen in the market. Can you talk to whether or not that
actually has been head wind to the business? And if it has what has
more than offset that you mentioned conversion. But what are some of the
other areas or we are just assuming that the headwind on some of the
bad press is just overblown? Thanks.
Brad Smith - President and Chief Executive Officer
Well,
Greg, first of all we are not Hollywood and so unlike Hollywood for all
PR is good PR. We certainly don’t like to have negative press out there
about our product or have any of our customers frustrated. I think the
first piece is the desktop lineup changes, we knew we made a mistake
when we started hearing the feedback from the customers. But it’s
important to understand that affected 3% of our TurboTax customers. So
while the noise was out there and the press coverage was pretty strong,
it really wasn’t a significant number of customers. And we worked really
hard to get in touch with each and every one of them and to they make
it right.
And so I’d say first of all the scope of that wasn’t a
significant as the press may have played it out to be. But from our
perspective we took it very seriously, because every customer matters.
And the second is on the industry-wide threat of cyber fraud attacking
U.S tax system. This has been an industry-wide challenge. It is not a
company specific challenge, despite some of the early press clippings,
whether you look at our own competitors issuing open letters from their
CEO and major newspapers. Or you know the IRS has been working with the
industry since 2012 to solve this or even the state of Montana issuing
in some press release last week, saying, hey this is happening to more
than one company.
I think most people understand that we are
progresses, we are applying the most advanced techniques and at the end
of the day they trust into it that we are going to process their
information and protect the privacy and security. So I think the
important thing here is the issue of cyber fraud is a threat to the tax
system. We’re one of the many players that want to be a part of the
solution, but you have to separate the signal from the noise. The press
is not representative of what we’re seeing and as a result I think what
you’re actually seeing in our business results, our customers trust our
brand, our product is even much better than it was last year, so we’re
improving conversion and that plays out in the marker place and that’s
why you see stronger tax results then maybe what the press might may
have led you to believe.
Greg Dunham - Goldman Sachs
Great, thanks Brad.
Brad Smith - President and Chief Executive Officer
All right. Thank you, Greg.
Operator
Thank you. Our next question comes from Walter Pritchard from Citi. Your line is open. Please go ahead.
Walter Pritchard - Citi
Thanks,
Brad, I’m wondering on the – you had a nice acceleration in the
QuickBooks Online subscribers and you added about 100,000 in your
guidance for the third quarter actually assumes you fewer than 100,000.
If I look at prior desktop seasonality, back when it was a pure desktop
business, you’d actually see a nice pickup from Q2 to Q3 in terms of
subs. I’m just wondering is the seasonality change or is there some
factor that you think drove Q2 that is a repeatable as we look into Q3
for sub adds.
Brad Smith - President and Chief Executive Officer
We
know that each of our businesses do have cycles to them and in small
business we do see a larger group of people buying heading into the New
Year. And then it tends to tail off a little bit into the latter half of
that, our fiscal year, so heading into the spring and summer. The
desktop will throw you a little bit out of whack there QBO was more of a
realtime consideration and you have a mix today of more service based
businesses, because we’re still building out advanced inventory to the
mix of the kind of customer and QBO is slightly different than desktop.
But
right now what you are going to see is – we’re still in the early
learnings of just how big QBO will be in each of the quarters. This is
our best forecast for the fourth quarter and it really reflects the
slightly nuance differences and the service based customers in QBO
versus more inventory based in desktop and the second is there is a
seasonal pattern to win the peak periods are for QBO, just like there is
and some of our other businesses.
Walter Pritchard - Citi
And
just Brad, a follow up on that. So you given a number I think out of
fiscal 2017 of two million subscribers and you talked about – about two
thirds I’m sorry three quarters of those coming in though new customers
and I’m wondering if what you learned in the second quarter especially
on that last part the mix of customers coming in new versus installed
based conversion, if there is any change in your view in terms of the
long-term?
Brad Smith - President and Chief Executive Officer
At
this time Walter, we’re not changing that long-term view, that two
million subs, our aspiration is not only to meet that but to exceed it.
We’re continuing to see strength in new to the franchise customers and
this particular quarter 80% of QBO customers were new to the franchise;
about 20% were migrators from desktop. We’re doing everything we can to
get desktop customers comfortable, we’re adding that advanced inventory
capability, or continuing to finish off things like job casting, we’re
running promotion, but as you learned from the TurboTax desktop
experience I just walked through.
Some of these customers aren’t
going to be move in anytime soon and we’re fine with that, what we
really like to see is we’re expanding the category, we’re getting new
people into accounting software that never even used our product before.
So right now, we are locked in on that 2 million number. And we just
raised our forecast on subs this year. So we are not moving that 2
million yet. But if we continue to close in the way we are, we’ll talk
to you about that in the future.
Walter Pritchard - Citi
Great. Thank you very much.
Brad Smith - President and Chief Executive Officer
All right. Thank you.
Operator
And our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.
Sterling Auty - JPMorgan
Yes,
thanks. Hi Brad, you mentioned the ACA was not causing TurboTax users
to leave to tax prep. I think the bigger concern that I hear from
investors is whether you install to share shift in DIY. Given your
prepared remarks it sounds like that is not the case I’m kind of curious
if that just where we are in this part of the tax season and maybe that
changes or is there something that you’re seeing that the ACA just
isn’t having any impact on that, kind of category shift.
Brad Smith - President and Chief Executive Officer
Sterling,
it’s a fair question. And I think it’s still out there for many to
think through. Our assertion from early on if you look to what happened
in Massachusetts back in the days when Romney was governor. There was no
shift between tax prep methods when a light program was introduced at
the state level so our hypothesis was if we do our job, and we take the
complexity and make it simple. This should not be a catalyst to the
assisted category. And we worked really hard to do that.
I think,
the second thing is, we do know that as you go further end of season,
you will see the assisted tax prep methods start to pickup a little bit
as more complex returns get processed. But right now, this is about
where we were this time last year with the assisted category growth
through February 6 reported by IRS and then also where the DIY category
was. And at the end of the season, the DIY category picked up a little
bit of share. So I believe we are going to see the same thing happen
this year.
My last point I would say is, we anticipated, if there
was going to be a big impact that ACA would impact earlier in the
season. Because when you look at those, you don’t tend to have health
insurance, there are often times those families that are living paycheck
to paycheck they need to file early to get their refund. And the fact
we haven’t seen the kind of shift that some of the industry we’re
suggesting was going to happen, leads us to believe that our original
hypothesis looks like it’s going to play out. We don’t expect this to be
a catalyst. But we also were prepared to respond if anything changes
based upon that, the balance of the season.
Sterling Auty - JPMorgan
Okay.
And then just one follow-up and you touched upon in your answer there.
Can you help us understand given the timing differences on when returns
are starting to be accepted et cetera. We end up with a lot of numbers
over different periods of time. So lot of apples and oranges kind of
reiterate for us what you think the tax season growth will be for the
tax business? And kind of what the results that you just reported
meanings in terms of hitting those goals?
Brad Smith - President and Chief Executive Officer
Yes,
Sterling. Also two things here IRS data through February 6, reported
the category the self prep DIY category, digital category with that
seven and system is down four.
If I take our numbers and right now
we reported the February 14th, if I move them back and make them
apples-to-apples, the number of e-filed returns we submitted through the
same date the IRS put their data out, we’re up 13%. So right after
that, you can just do the math and say, okay, we’re growing 13, the
categories growing 7, it looks like TurboTax is picking up some share.
And that’s kind of where we were last year too.
If you step back
and look at our assumptions for the full season, our forecast were based
upon the IRS total returns growing about 1% and right now that’s what
the IRS has reported so far through February 6. The second as we
anticipated that the do-it-yourself category would pick up about a point
of share out of the total returns filed. Right now through the results
of February 6th, it’s up almost 3 points. So it’s a little bit higher
than that, but we know it works through the balance of the season, it
does start to shift a little more to assisted, so that'll come down a
little bit if history plays out.
The third lever we assumed is
that we would pick up share and so far the data suggest that we picked
up several points of share, but we also know we came off of a very
exciting program called Absolute Zero. So we’re going to say if we can
hold our ground for the balance of the season and the last pieces
revenue per return. We fully expect the customer growth will outpace
revenues. We don’t expect that to be a big catalyst and that adds up to
the 5% to 7% total guidance we gave for consumer tax. I know there is a
lot in there, but I hope that parse the numbers out and gave you
apples-to-apples of us versus the IRS and then what our assumptions
were.
Sterling Auty - JPMorgan
That was perfect. Thank you guys.
Brad Smith - President and Chief Executive Officer
You’re welcome.
Operator
Thank you. Our next question comes from Ross MacMillan from RBC Capital Markets. Your line is open. Please go ahead.
Ross MacMillan - RBC Capital Markets
Thanks
a lot. I have two, so first on consumer tax, a lot of price changes
this year across the portfolio. And Brad you’ve said a couple of times,
you expect units to grow faster than price,. But by my math so far this
season it looks like revenue per unit is a bit higher than last year and
I’m a little surprised that just because you’ve obviously got the
Absolute Zero program going on. Any comments on that – is my math right
and any thoughts around that so far?
Brad Smith - President and Chief Executive Officer
Ross,
your math is right. As Neil was going through his opening comments, he
said not only we have an exciting program with Absolute Zero, but our
actual paid mix is higher than we had forecasted. A part of that is
driven by the complexity base lineup we move to last year where we were
trying to help customer to get into the right product. And so in
TurboTax Online that’s actually helped us to get customers to the right
product. And as a result our paid mix is healthier. People are getting
to the Deluxe and the Premier versions of the product, which is where
they should have been all along.
And that’s one. Another one is
just simply conversion and attach as we continue to make it more
seamless and you’re able to find services that are important to you.
We’re able to make that mix healthier as well. So those two things are
adding to slightly higher revenue per return at this point in the
season, but as you know, we still got about 60% of the season yet to go.
And so we’re going to see how the ultimate assumptions play out when
we’re done on April 15.
Ross MacMillan - RBC Capital Markets
That’s
helpful. And then just a quick follow-up on the small business side
obviously with the introduction of self-employed and as you are pushing
into international markets, there going to be quite different dynamics
around ARPU or revenue per subscriber. Just from a big picture
standpoint, how would you have us think about that as we progressed
through this transition because I think right now you still got that ARR
number on small business online ecosystem growing at a pretty nice
clip.
Brad Smith - President and Chief Executive Officer
Yes,
Ross, I want to let Neil take that. I want to Batman to have a chance
to speak here. I tend to halt the airways, so we’ll turn it to Neil on
this one.
Neil Williams - Senior Vice President and Chief Financial Officer
Yes,
so you’re right Ross. I mean as you look at the self-employed product
rolling out and products growing globally where we have less attach
opportunities, you’re going to see the ASP be slightly coming down for
QuickBooks Online ecosystem overall. We modeled all that in to the
lifetime value equation we shared with you back at Investor Day and
we’ll update as we get in at the end of this year. We’re closely
monitoring how different things are impacting that as you heard us talk
about on the call today. We like what’s happening with the tax
particularly in the U.S. We made some acquisitions that will help us get
to payroll faster outside the U.S., which will help those assumptions.
And
we’re waiting to see how well we do with the self-employed product that
we’re excited about this point, but it’s still very early days. So the
short answer to your question is that the lifetime value equation that
we gave you back in Investor Day last year is still good at this point
and we’re assessing as we go through each quarter the puts and takes and
we’ll update that for you at the end of the year and kind of show you
how it migrates from one to the other, but look for higher attach rates
in the U.S. improved retention to mitigate some of the downward pressure
you would see outside the U.S. where you don’t have the same attach
opportunities and our product like QuickBooks Self-Employed, which
clearly has a lower ASP and lower attach opportunity more likely than
the traditional QBO product.
Ross MacMillan - RBC Capital Markets
That’s very helpful. Thank you.
Operator
Thank you. Our next question comes from Kartik Mehta from Northcoast Research.
Kartik Mehta - Northcoast Research
Hi,
Brad and Neil. Brad, you talked about your desktop customers about 3%
being impacted by the changes. So do you think the decline you saw in
desktop 7% is the majority of that just people transitioning to online?
Or I guess how would you parse out kind of the changes and then clients
impacted versus transitioning to online?
Brad Smith - President and Chief Executive Officer
You
know, Kartik, if you look at the last five years of TurboTax desktop,
the average has been a 3% decline, but two of those five years, the
desktop was actually down about 6%. So it’s happen to be the two years
where there’s a delayed opening to tax season, so it ramps up a little
bit later. But I would tell you our 7% decline season today is
reflective of just an ongoing secular trend that people moving out to
desktop to the cloud and it’s probably in that 3% to 4% range and the
rest of it honestly I think was just the result of us having made a bad
decision on a desktop line-up and we’re going to have to work hard to
earn those customers back. And so that’s the truth of it about half of
it is secular shift to the cloud and the other half is a self-inflicted
wound that we're going to fight for and try to get those customers back.
Kartik Mehta - Northcoast Research
And
Brad on the QBO side you said – I believe you said 80% are new to the
system. As you look at those customers, are they new businesses or they
existing businesses that are now switching over to QBO?
Brad Smith - President and Chief Executive Officer
It’s
a combination of both. New to the world businesses are finding it a lot
easier to come in now and get up and running from any device they want
to use including a tablet or a phone. And the other our existing
businesses that historically have been using Excel spreadsheets. And so,
it’s really a mix of complete new to the world and then those are new
to the category.
Kartik Mehta - Northcoast Research
And
just one last question, Brad. Have you seen a change at all in your
cost to acquire QBO clients based on the type of customers you’re
getting and maybe if you see another competition out there?
Brad Smith - President and Chief Executive Officer
We
continue to see an improvement in our cost to acquire customers. As the
accountants are getting more comfortable with QBO, the new re-imagined
version, they’re recommending it and of course that recommendation leads
to a faster, yes, from the small business side. We’re also getting
better SCO and SEM and so ultimately our direct channels are more
efficient and our account referrals are building [indiscernible]. And
outside of the U.S. as were in each of the countries we are in brand
building mode so the cost of acquire is more expensive in those
countries but on a quarter by quarter basis, we’re seeing the efficiency
come in there as well. So you put it all together and our cost to
acquire is getting more efficient regardless of the competitive dynamic
in any of those countries.
Kartik Mehta - Northcoast Research
Thank you very much, Brad. I appreciate it.
Brad Smith - President and Chief Executive Officer
All right, thank you Kartik.
Operator
Thank you. Our next question comes from Raimo Lenschow from Barclays. Your line is open, please go ahead.
Raimo Lenschow - Barclays
Hi,
thanks for taking my question. I wanted to stay on QBO. You have seen
an acceleration of subscribers – of subscriber growth ever since you
launched in your harmony of product. And how do you think about where
that is going to max out what are the puts and takes to say like okay
50% of something, we think it’s good or can it go to 60% or 70%. I mean
just – you know at some point, we’re going to hit kind of a number where
you won’t accelerate and I just want to kind of be ready for that. And
then also can you talk a little bit about the international business in
terms of what are the stronger – which countries did you like and where
the performance could have been better? Thank you.
Brad Smith - President and Chief Executive Officer
You’re
welcome. I wish that I had answer for your first one. I’d like to know
when that’s going to max out too, not because I am anxious to get there,
but I just want to see if we can blow past. You touched on it. We’ve
had half dozen quarters here. Now, we’re continuing to accelerate
quarter over quarter and we’re feeling very good about the trajectory.
So right now, I can’t tell you that we’ve got a flat line that we drawn
out because we think we’ve got a lot of opportunity ahead of us as we’re
expanding the category, I wish that could be more helpful on that one.
At
global markets right now, with the acquisition we just made of
ZeroPaper in Brazil that takes us into a new country that is now our
sixth country, so we have Canada, the UK, Australia and India, before
we’ve been talking to you about historically. We mentioned at Investor
Day, we were doing a Greenfield launch in France and now with the
acquisition of ZeroPaper in Brazil. In terms of the country, these one
have had different characteristics. The Canada business is rocking and
rolling. It continues to grow more profitable. As we look at the UK that
is a very competitive market right now with many players over there,
some established, some new. We continue to accelerate our
quarter-over-quarter performance, but we still have work ahead of us to
get into the number one position in that market.
In Australia, of
course, that is – somebody else’s home court. And so we’re there in an
aggressive fashion to show that we can play in the most contested
battlefield there is. And so far that has been our fastest growing
market – by the fact you would expect that to be in the place where we’d
have the most hostile environment. India is Greenfield. We’re truly
creating the cloud category there because almost everyone there is
desktop and quite frankly many of the products have a DOS like feel to
them. And so we’re currently trying to create the category and get
people comfortable at the cloud in India. France and Brazil are going to
be our newest entries and right now we’re in the early learning phases
there.
One we’re doing organically, where we’re taking QBO and
we’re literally localizing it and then rolling out in the market and in
Brazil we’re doing it inorganically with ZeroPaper. And so each of the
countries has a different set of characteristics. You put them all
together and we’re growing 170% and we’re felling very good about our
global trajectory and the fact is that we’re getting more efficient than
our cost of acquire each and every quarter.
Raimo Lenschow - Barclays
Alright, thank you.
Brad Smith - President and Chief Executive Officer
All right.
Operator
Thank you. Our next question comes from Brad Zelnick from Jefferies. Your line is open. Please go ahead.
Brad Zelnick - Jefferies
Great,
thanks for taking my question. Brad turning back the clock to February
6th on tax, it’s nice to see you’re taking share based on that 30%
growth in returns that you have shared. Do you have any insight or
thoughts on where the shares is coming from even just broadly weather
from the larger or smaller competitors?
Brad Smith - President and Chief Executive Officer
You
know Brad, we really don’t at this point. None of our competitors as
well tax act did report as a part of Blucora, but there wasn’t a lot of
data that was shared there. They kind of reiterated their guidance for
the season. The other major competitor is not going to be reporting
until I think March. And so once they get their data out there and then
we have [indiscernible], we’ll be able to have a better way to
triangulate, but today I would tell you – it was just be speculation on
my part.
Brad Zelnick - Jefferies
Okay.
That’s fair enough. If I could follow-up with one more on the change in
new QBO payroll attach, going from an opt-out to an opt-in model. Could
you maybe just give us a little more color why the change and talk
about the impact of the bigger picture?
Brad Smith - President and Chief Executive Officer
Yes,
sure. I can Brad. What we try to do is, make it very seamless for you
to come in sign up for QBO and have payroll included. What ended up
happening is a portion of customers would come in and they would find in
their first bill that they were paying for payroll. And in many cases,
they didn’t have a need for payroll, if they didn’t have employees or
they were using in other service and it became a point of frustration
for them, they would drop customer care calls or in many cases they
would just cancel their subscription. And so what we realized was, we
weren’t clear enough and it was confusing. So instead, what we done is,
we move to an opt-in model.
We’re based upon certain moments in
needs, you’re adding an employer, and you’re going into the employee tab
we are able to basically make it more elegant to say, hey, do you want
to have this payroll service. What we are seeing right now is, we’ve got
cohort analysis and we are actually seeing an improvement in our
retention. The couple of 100 basis points, and that’s one of the biggest
leverage you have in a subscription business is improving your
retention. And while we’re taking a step back because I think we had a
false positive when we were out there in that 30% range of attach. We’ve
taken a step back into the lower 20s. We’re actually improving the
retention and we think that’s going to add up to a much healthier
franchise over the long-term.
Brad Zelnick - Jefferies
Thank you so much.
Brad Smith - President and Chief Executive Officer
You’re welcome.
Operator
Thank you. Our next question comes from Gil Luria from Wedbush Securities. Your line is open. Please go ahead.
Gil Luria - Wedbush Securities
Yes,
thank you. I wanted to ask about the impact of the true zero promotion.
Have you seen a higher percentage of your online TurboTax filers in the
promotion versus last year. If I’m not mistaken, the promotion lasted a
couple of weeks longer this year. And in obviously went down from $15
to true zero, of the $15.2 million TurboTax Online use of this year was a
higher proportion – in this proportion within the promotion versus of
$13.6 million from last year.
Brad Smith - President and Chief Executive Officer
Gil,
the answer is more than last year. But the paid mix is healthier than
we had forecasted. So we actually got the best of both worlds. I was
looking at the analysis – Neil and I sat down with tax team on a regular
basis as you might imagine free tax season and they are showing us the
source of the new customers. And the two biggest franchise
year-over-year, which are really encouraging, our first time filers
people who never filed tax returns before, and then first time moving
into the category.
And those are basically both saying we are
expanding the DIY category of this kind of offering. And so I think this
is really exciting for us because we know we can get a customer in the
franchise and we can actually monetize them and grow the lifetime value
if their tax situation becomes more complex. So right now, we are seeing
not only a better – a conversion than last year in terms of people
coming on the promotion but our paid mix is healthier than we thought as
well.
Gil Luria - Wedbush Securities
Got
it. And then on the – in the fraud situations did you find that those
customers that were affected by fraud that somebody else filed under
their information that the attrition there was higher than the rest of
population was that a significant factor?
Brad Smith - President and Chief Executive Officer
It
wasn’t and I tell you why first of all I want to make sure that I will
clear in the opening comments that the headline here is our customers
know they can trust Intuit. There is nothing we take more sacred in the
privacy and security of their data and two things are fact today one is
we’re up and running and processing returns in the federal and all the
states and the second is there is no breach of Intuit systems. And that
is not only the result of our own analysis but outside third-parties
have coming in and run all their diagnostics with us.
And we’ve
reached that conclusion I think with the customers the thing that they
appreciate if they’ve actually been the victim of having their ID stolen
from one of these other high-profile sources that we’re all reading
about in the newspaper. And in fact last week in Stanford University I
tend to the Cybersecurity Summit with President Obama and others.
Over
100 million identities have been stolen in the last 12 months that’s
people walking around with somebody else’s Social Security Number and
they were attacking the U.S. tax system and trying to file these
returns, and so customers understand that this is broader and what we’re
doing is we’re helping them navigate the process we’re getting them
access the agents who can help them get their filing done for them. And
so it’s not causing an attrition issue because they recognize this is in
a particular product issue this is a systemwide problem and they were
appreciating the help. So we have not seeing an increase in attrition
due to that particular issue.
Gil Luria - Wedbush Securities
That’s great. Thank you.
Brad Smith - President and Chief Executive Officer
All right, thank you.
Operator
Thank you. Our next question comes from Kash Rangan from Merrill Lynch. Your line is open. Please go ahead.
Kash Rangan - Merrill Lynch
Hi,
thanks for my question. Brad with respect to the new user attach rates I
know you mentioned that due to a different changing with – different
methodology the numbers looking little different. But can you talk to
how this trajectory should continue so as to enable you to hit or exceed
your goals for the long-term are we looking at a hockey stick type
trajectory or do you think that the trends so far a more normal
progression towards the attach of payroll and payment. So you can hit
your ARR objectives longer term?
Brad Smith - President and Chief Executive Officer
Yes,
Kash, we do see a continuation of a normalized attach rate we put in
our prepared remarks that our payroll and QuickBooks Online we
anticipate will be in the low 20s in the next few quarters. We see that
moving up into a healthier mid 20s and beyond as we get pass the next
few quarters. But we also see a corresponding offset which is an
improvement in retention. And as a combination of those things that will
drive lifetime value when we step back and we look at the payroll and
the payment attach rates for new users in QBO and then you look at the
penetration opportunity against the base.
We really do see
opportunity ahead of us and we continue to see that increasing and
improving quarter-over-quarter. So aside from these next few quarters of
payroll as we have to grow over this opt-in, opt-out saying we do see a
continuation of strengthening attach rates for our payroll and payments
products which lead to that lifetime value assumption we’ll share with
you at Investor Day.
Kash Rangan - Merrill Lynch
Got
it. With respect to the desktop QB product are there any plans to at
least curtail development offer if not curtail selling of it completely
and going to a maintenance mode at this point so we can get the customer
base to slowly shift to the online?
Brad Smith - President and Chief Executive Officer
I
was born at night but not last night and coming off of the TurboTax
desktop challenge that we just had I’ve learned a pretty important
lesson there which these customers are happy with their product we have
committed to making sure that if they want to stay on the desktop we’re
going to support them for as long as they want to use that product. But
we’re going to make it really enticing for them to get to the cloud but
we have zero plans to sense of the product or to do anything that will
upset them and make them decide to shop someplace else. And I didn’t
mean to be flip I meant to be self critical which has make a lot of
mistake that’s okay make two mistakes and somebody ought to slam my hand
in a door.
Kash Rangan - Merrill Lynch
I
appreciate the candor and finally maybe I missed this about six months
back. Did you share an ARR goal for the online business longer term
fiscal 2017 or 2018 and if you did I look at it but if you didn’t I
would love to hear your thoughts on that. Thank you.
Brad Smith - President and Chief Executive Officer
No,
we did not Kash, we shared an outlook for company revenue which fairly
is the QuickBooks Online revenues of portion that we did not get more
specificity around the overall revenue guidance number.
Kash Rangan - Merrill Lynch
Okay got it. thanks a lot guys.
Brad Smith - President and Chief Executive Officer
All right, Kash thank you buddy.
Operator
Thank you. Our next question comes from Jim Macdonald from First Analysis. Your line is open. Please go ahead.
Jim Macdonald - First Analysis
Hi, Good afternoon, guys.
Brad Smith - President and Chief Executive Officer
Hi, Jim
Jim Macdonald - First Analysis
Hey,
looking at the February 14th tax dated at that point do you think the
impact of a delayed filing last year versus this year is washed out and
then I don’t know if you can quantify the effect of your Absolute Zero
program do you think in that data?
Brad Smith - President and Chief Executive Officer
Yes,
Jim, our assumption is that the effect of that delayed filing last year
and where we’re now its pretty much washed out at this point. We’ll
have to see full season how everything shakes out but that’s definitely
what we’re operating from in terms of the Absolute Zero promotion we
like the results so far we’re going to wait till the end of the tax
season and we’ll look back and say did it achieve everything we thought
it would. But so far the early data suggesting very positive for us and
we like the impact of the new franchise new to the world filers coming
in we like the fact people are moving into the category for the first
time. We like the fact that the categories expanded and also that looks
like we picked up a couple points of share and all of that was still
improving our paid mix. So far, so good, but we want to wait for the
full season effect to see, ultimately what the impact was.
Jim Macdonald - First Analysis
Great
and then – down in Brazil on ZeroPaper. What are your plans about using
their product versus – will their product become effectively QuickBooks
Online down there. What are your thoughts on how that will work in
Brazil?
Brad Smith - President and Chief Executive Officer
Yes,
Jim, Brazil is a unique market they have those notion of something
called [indiscernible] and it’s sort of like an invoice here, the
payment methodology and then you can convert that invoice into cash and
that’s was ZeroPaper has done, it’s really for what we’re doing here
with QuickBooks Self-Employed it does micro businesses, but down there
it’s a tool that micro businesses need to do to basically get paid. And
so what we’re going to be doing is taking the product and then importing
it over on to the QBO platform and think of it in Brazil becoming the
entry level skew and then eventually that will lead out to our more main
line QuickBooks Online product. So it will remain in market, it is a
Brazil specific product, but that’s a rapidly growing economy with a lot
of opportunity and we’re going to put it on our platforms, you can
naturally unlock and grow into QBO overtime.
Jim Macdonald - First Analysis
Great, thanks.
Brad Smith - President and Chief Executive Officer
Alright, thank you.
Operator
Thank you. Our next question comes from Scott Schneeberger from Oppenheimer, your line is open. Please go ahead.
Scott Schneeberger - Oppenheimer
Thanks
Steve and Brad. Just curious on the desktop, the pricing change
obviously didn’t go as you had planned and that was one of the things
that was probably going to subsidize Absolute Zero. I’m just curious you
guys have obviously reiterated the revenue guidance for consumer tax.
So I’m curious Brad how confident are you at this juncture of the year,
we know it affected 3% of TurboTax customers and we saw our volume
impact. But just on revenue per return, obviously you have a lot of
moving pieces, so was that a headwind and you mentioned earlier some
positives on revenue per return. Could you just compare and contrast
these at this juncture. Thanks.
Brad Smith - President and Chief Executive Officer
Yes
Scott, so we’ve seen some puts and takes so far in the season. The take
was we reversed our decision and we’ve give the customers the upgrade
for free and that does account for some revenue that we would have
originally had in our forecast, the flip of that is at Neil said even
with that absolute zero we’ve had a healthier paid mix than what we had
in our forecast. So when you put it on the blender, it’s comes out to us
having the confidence to sit with you today and based on what we see
reiterate our guidance for the full year. And I think it’s really just
the combination of all these things.
Scott Schneeberger - Oppenheimer
Great
thanks and then a following-up with regard to strategy and I guess we
have to see at this year completes but just on going to free state with
free federal. Is that something you feel that you can reverse out in the
future or now that you’re there, is it something that you think is a
permanent thing?
Brad Smith - President and Chief Executive Officer
Well,
we’ll certainly take a look at how the program played out at the end of
the season and if it’s an effective program, then you will see us
continuing to do things that we think makes sense for customers and
makes sense for our strategic goals which is growing the category and
our share. If it’s not a successful program, we have found that you can
make the kind of changes and those kinds of promotions year-over-year
and customers understand. So at this time point it’s pretty premature
for us to speculate what's going to happen with that absolute zero next
year next year, but so far we like the results given where we’re in the
season.
Scott Schneeberger - Oppenheimer
Great, thanks very much.
Brad Smith - President and Chief Executive Officer
All right.
Operator
Thank you. Our next question comes from Jennifer Lowe of Morgan Stanley. Your line is open. Please go ahead.
Jennifer Lowe - Morgan Stanley
Great,
thank you. Brad I wanted to touch on some of the longer term targets
around QuickBooks Online subscribers specifically the increased guidance
for this year and then the targets for 2017 and if you look at those
I’m curious how you think about those in terms of where the business is
today with 80% coming in as new to the QuickBooks’ franchise, versus
what your expectations within those projections are around desktop
conversions or potentially future contribution from the self-employed
product?
Brad Smith - President and Chief Executive Officer
Yes.
So Jennifer this is as we’re sitting here and speaking we’re looking at
the assumptions we had and then what’s playing out in the market there
hasn’t been anything that’s fundamentally different, I’ll give you a
couple of tweaks. One is the product is continuing to perform in a way
that we’re delighted by, its expanding the category and getting first
time small businesses, as well as people here are new to the accounting
software category in. So we originally had assumed that we will have a
slightly larger portion of desktop moderator is going to the file, that
number is nice at that level that we thought but we're getting more new
to the franchise customers. And so the number hasn’t changed the mix
has.
And the other thing is QBSE QuickBooks Self-Employed this is
new for us and we’re looking to make it a global product. Right now, we
don’t count those customers in QBO, if they aren’t paid subs. And we do
have deals with Lyft and Uber and other that we mentioned that today is a
free QuickBooks Self-Employed but then ultimate the way we monetize and
if you want to send that into TurboTax we have an attach rate that this
shows up in a different business unit called TurboTax. So it’s a nice
little one Intuit ecosystem in place. We’ll see as QBSE growth and
becomes more meaningful as it part of the paid subscribers we’ll wholly
break out so you can see it. But right now, it’s only about 4000 of the
total number of subs so it’s pretty immaterial.
So you put all
that together, we’re hoping that we’re going to get more and more
desktop customers excited about the cloud if not we still feel good
about our two million subs because we’re getting more people into the
franchise more than we had anticipated with the new QuickBooks Online.
Jennifer Lowe - Morgan Stanley
Great.
And maybe just a follow-up one quick additional question, when you
talked about where those 80% are coming from you highlighted new
businesses, you highlighted customers coming off of Excel. But curious
if you’re seeing customers coming off of competing small business
accounting solutions that might have not chosen to go with QuickBooks in
the past, given the more limited online offerings that might be making
different competitive decisions today.
Brad Smith - President and Chief Executive Officer
Well,
in the U.S. and I know that everyone on the call is familiar with this.
We are primarily the player in the U.S. with QuickBooks desktop. The
share is over 90% then you’ve got a couple of other players. The online
players are relatively new in the United States. So if we were to
actually growing the category, the read and do businesses that is
started because the economy is getting healthy, there are part of 40%
that is still in Excel spreadsheets. And so that’s really the
opportunity there. Outside the U.S. and other countries we are able to
convert some customers away from some of the competitive products. But
we are also getting an influx of people coming off spreadsheet there
too. But the mix is a little more – its more people coming from
competitors and what you would see in the U.S., but by and large a lot
of them are still new businesses and Excel spreadsheets.
Jennifer Lowe - Morgan Stanley
Thank you.
Brad Smith - President and Chief Executive Officer
All right.
Operator
And our next question comes from Michael Millman from Millman Research. Your line is open, please go ahead.
Michael Millman - Millman Research
Thank
you. Looking at fraud on online, can you talk a little more about the
EITC fraud, which I guess has been ongoing and certainly block has been
doing battle with that and got to move from Congress. And then secondly,
and related to tax, can you talk about whether you’re seeing changes in
lifetime value for the tax systems depended upon – or at least over the
several years as you move more and more starting with zero or absolute
zero currently. Thank you.
Brad Smith - President and Chief Executive Officer
Hi,
Mike. So on EITC, yes, I’m aware that our collected industry peers are
all standing shoulder-to-shoulder and working with the government to try
to take on the cyber fraud. And everyone has seen a different side of
the animal and I know in our particular case the competitor you just
mentioned, they are out there talking about two particular things, the
need for license professionals and to keep an eye on earned income tax
credit where they the observed some patterns that have been nervous as
you might imagine we have algorithms and data we look at in our own. We
produce this suspicious activity report and we have since 2012 that we
provide to the IRS on anything that we see that may be unusual and then
the IRS is the ultimate legal entity that determines whether that is a
legitimate or a fraudulent return.
And so as we look at our EITC
data in the context of that, we’re seeing right now, that the growth of
the EITC this year season-to-date is inline with our units. And we don’t
see that particular category sticking out as any more suspicious in our
mix today than any of the other variables we look at. But that is not
to say that there is something that everyone in the industry have to
keep an eye on, we just haven’t seen that particular pattern emerge in
out own customer base.
Michael Millman - Millman Research
Have you seen a change in that over the last three or four years?
Brad Smith - President and Chief Executive Officer
Have we seen a change in the IT’s - I’m sorry can you just be lot more specific Mike?
Michael Millman - Millman Research
Percentage of filers using EITC are collecting on it.
Brad Smith - President and Chief Executive Officer
You
know Mike I honestly can’t answer that question. I just don’t know that
data of the top of my head. So I unfortunately I can’t answer the
question. I apologize for that.
And you have a second question
which was the lifetime value piece. As you saw last year our revenue per
return was down slightly as we grow our units and we grow our units
faster than our revenue and ultimately our strategic goal is to expand
the self-prepared category and then grow our share and we said that we
would love every year and a half units grow faster than revenue because
we know overtime the last ten values going to improve.
The answer
to your question about the individual tax payer are we seeing improved
LTV? We are. But when you put it in an aggregated mix, you got a bunch
of new people coming in they’re coming in at first year and absolute
zero, it does inflate the revenue per return on an average. But what we
saw last year moving to TurboTax Online with this new line up, we’re
getting a healthier mix, have paid. I think that’s where one of the
question’s earlier that cash or someone had asked, which is, is the
assumption right, I think, revenue per return being a little healthier,
the answer is yes, because on an individual tax return basis, we’re
actually seeing customers move up the move up the product line. So at an
individual level the LTV is healthy, but in aggregate when you bring
more new people in and they come in and their promotion price it’s
actually deflating the average.
Michael Millman - Millman Research
Thank you
Brad Smith - President and Chief Executive Officer
Alright, you’re welcome.
Operator
Thank you, gentlemen, that is all the time we have today for questions. Would you like to close with any additional remarks?
Brad Smith - President and Chief Executive Officer
You
know Saeed, I would. And I appreciate it’s a little bit past our normal
time and we were wanting to do that, because we want to make sure we
regard to everyone’s question. So let me just wrap up time, we want to
thank everybody for your patience today. I know our opening remarks were
a bit longer than usual, but we wanted to give you as much context as
we could around the two recent events.
If you could take anything
away from this call, I hope that you heard that me, Neil, Matt and the
others feel confident and where we are to the first half of the year and
we’re excited about momentum we’re building in the back half. And with
that I want to thank you for your questions and we’ll look forward to
catching up with you on the after calls. Take care everybody.
Operator
Ladies
and gentlemen, thank you for participating in today’s conference. This
concludes today’s call. You may disconnect and have a wonderful day.
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