Intuit Earnings Call Insights: Tax Business and Growth Rates

Intuit (NASDAQ:INTU) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Tax Business

Peter Goldmacher – Cowen and Company: Brad, I want to talk to you a little bit about this reorg. It seems like you’re taking a lot of the same players, putting it in slightly different roles. So, it looks like you’ve got some cross training going there. But the one thing I noticed that was really interesting was Sasan who was your CIO is now turning tax. So, you talk about these changes as an opportunity to take advantage of your Connected Services strategy and then you talk about using customer data for ease of use and benefits to end user and then you put your CIO in that tax business. So, what are the implications for tax now that Sasan is – your former CIO is now running that business?

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Growth Rates

Brad Smith – President and CEO: First and foremost, we have a very strong and deep bench. And as you know, over the years, we have taken pride of moving our leaders into functional roles and different business roles to round out their experience and get them ready for bigger opportunities. So as we approach this year, Kiran and I have been speaking for the last couple of years about his personal true north and at that point in time, we decided and Kiran was very interested in talking about what he wanted to do in the next chapter and our hope was that that next chapter was to be with Intuit forever and ever. But at some point, he reached a point where he said it’s time for me to retire. So, we celebrated his birthday a week ago and he said now is the time. And it set up the opportunity for us to make some key organizational changes. In the case of Sasan Goodarzi, which is where your specific question was and Sasan has actually been the general manager of many of our businesses. He led our vertical businesses several years ago in the early 2000. He was the general manager of our accounting professional division, the ProTax portion of tax. He was also the general manager of our Digital Insight or Intuit Financial Services business for several years and we’ve had Sasan in the CIO role to help us move the company from (indiscernible) software to the cloud. So, what we get in Sasan is a very seasoned executive whose run multiple portions of the company’s business and he clearly understands the power of a great product, the importance of having a platform that allows data to flow freely for end users and third-party developers to help us make our products better and he understands how to use data to make things a better outcome for the customers. So, he is the right leader for the next chapter of TurboTax as we put our energy into having a more personalized tax experience and building the next innovative set of products that will change the landscape for tax overall. The rest of the leaders are also well positioned as they step into their new roles and it’s the next growth opportunity for them. But in terms of Sasan specifically for tax it’s general management experience, his opportunity working in our CIO roll, moving us to the cloud and working with data and now moving him into the consumer tax business we think positions him and the company for the next chapter upgrade…

Peter Goldmacher – Cowen and Company: I have a corollary, so two tax seasons ago you felt like you didn’t compete well against H&R Block and that’s showed in the share shifts. This year tax overall was weak, but you competed much better against H&R Block and now you’ve got your CIO running tax. So, can you draw some lines between the tax season a year ago, this tax season and tax season next year and the kind of things that you think you can do differently to get that tax business where you think it can be which you’ve said is an 8% to 10% growth business?

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Brad Smith – President and CEO: Yeah, Peter I can. A couple of years ago we started to see the early signs of the manual filers starting to reach a plateau in the single-digit million. We also saw a significant opportunity for a group of people who used an assisted tax experience to say they would be open to software, if the products were simple and easy for them to use and if they had enough confidence to not be a filling lot they were alone, if they had a question. We’ve been running a lot of experiments. We’ve been testing a lot of things We’ve had tax advice; we’ve launched SnapTax on the mobile platform; and we’ve started to see things that are really working and quite frankly, some things that haven’t worked as well as we had hoped. We think between two years ago what we learned with the experiences we had and in this year what we learned started to work, we have the foundation for what we think will have a much stronger season as we look ahead next year. If I had to put (a low) around what that is, it’s what I talked about in the prepared remarks. It is a product that is so simple, so elegant and so easy to use and (indiscernible) that’s customized for you that you don’t have questions and you have no concerns about whether or not you can do your taxes on your own. That’s going to be our emphasis. That’s the way our franchise has built itself over the last three decades and that will be the energy we put into next year as well.

Brent Thill – UBS: Just on the tax business practice. This has been your third year of declining growth and if this pace continues, does this put weight on other initiatives that you have to kick start now if you assume that next year that tax business is going to be a mid-single-digit grower or do you feel that there is a snapback, if you will, and that does not put weight on the Small Business segment to find new innovations or push international quicker. Could you just walk through how you think about the dynamic and I know you’re not giving guidance for next year, but I think everyone is just trying to understand with a Company that’s got a goal of growing 10% a year with steady operating margins, how do you do that with the tax business at that rate of growth?

Brad Smith – President and CEO: Yeah, I can. And what I would say is, this is the power of a strong portfolio of businesses that just a few years ago in the depth of the recession where small businesses struggling to get to double-digits and tax business was continuing to plough along at a good strong double-digit rate and what we’ve had in the last year and for the last year actually – two years ago rather each of our – excuse me – our TurboTax results grew 11%. This year, it was a single-digit lower, but our Small Business Group is growing 17%. So, the Company overall is healthy and we have the ability to step back and say what we can do to reignite growth in all of the businesses that they hit a period of time where they’ve actually slowed down a little bit and that’s where we are with TurboTax. We continue to see tremendous upside and opportunity in small business. We do think global is a tremendous opportunity for us that we can get it right, and quite frankly, as we look ahead next year at tax, we look at it as a multiyear effort. We clearly think we can do better than the 4% we did this year. I’m not here to tell you that it in the next 12 months we see a double-digit growth year. We’ll provide guidance in August, but what we do see is a strong franchise in tax that when you put that in conjunction with our ProTax business has the potential to do many more of the nation’s tax returns and that’s our focus on one of our two core strategic goals.

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Brent Thill – UBS: Just a quick follow-up on online, you didn’t get the market share gains you wanted. What in your view – why didn’t those gains play out and who did take the share from your perspective in your early data?

Brad Smith – President and CEO: Yeah. We are still sorting through all the data as well. As you know, there is a lot of cloudiness right now around what happened in the macro attacks. I think, even the IRS is working towards what they had anticipated the number of returns to be versus where it is, looks like it’s down about 1% versus growing 1% to 2%. When you look at the actual tax category, that’s the part of the macro and then when you get down into share, it looks like we did very well and retail actually picked up about 200 basis points, and I know, we always talk about online because that is the future, but retail is still 25% of the market in unit. So, 200 basis points was good result and in mobile, quite frankly, it looks like we outpolled the second closest competitor 8 to 1. When we get into online, it looks like right now from the data we’re seeing – we use third-party data sources that we had a couple of key competitors, two competitors who may have picked up about a half point each and then everyone else is pretty neutral. So, I would say that it’s probably those two competitors that picked up a little bit and then everyone else pretty much had a flat year and that would put us into the flat category as well.