Intuit Inc. (INTU) Earnings Call Transcript & Summary

Hello. Good afternoon, everybody. It's a little bit after market close. Our next company to be presenting is Intuit. Intuit, as many of you know, just a world-class company, a world-class management team, a really -- an outstanding example of a good corporate citizen in our world. We're delighted to have Alex Chriss, who is Executive Vice President. His responsibilities pertain to the small business set of the equation. We also have Kim Watkins, who many of us know is Head of Investor Relations. With that quick introduction out of the way, Alex, you and I have not met before, it would be great if you can just walk a little bit through your background, how long have you been at Intuit, what did you do prior to that and what are your responsibilities, and then we'll jump into some questions that pertain to the big questions about small business. Let's talk that way.

Yes. Well, fantastic. And thanks for having me, Kash. It's great to be here with you today. So I've had the pleasure of having a wonderful career here at Intuit. Briefly before Intuit, I ran 2 successful start-ups. So I was an entrepreneur to begin with and then has spent the last 16 years in various parts of Intuit, mostly focused on small businesses. So I started and led our partner platform and really our third-party developer ecosystem. Started the self-employed group in our foray into solving the needs of our self-employed population, launching QuickBooks Self-Employed app, and then was our Chief Product Officer in small business for 3 years, and then most recently, our General Manager here for the Small Business Self-Employed group.

Wonderful. Wonderful. That's very impressive. And by the way, I had to tell you the reason we're not having video for this call -- I really wish we had video for this call. If we had video for this call, it would be so good that you will not think about coming back to our conference. You would say, "Hey, Kash, didn't that video thing work just as well?" and Kim might say, "Let's just do virtual." No, no, no, we want to come back to an in-person conference, and so that's why we're doing many audio presentations. I know that's not really the reason, but I think it's a good way to interpret why we're not doing video here.

Alex, talk to us about -- I know I had some nitty gritty questions lined up for you about small business, but I always like to start off something high level. What are the key trends pre-COVID, during COVID that are driving the small business space from Intuit's vantage point?

Yes. So we've been thinking about the trends, and many of these actually predate COVID, and what's been interesting about the COVID environment is many of them have just accelerated. And so we've been looking at trends such as how do small businesses think about interacting in a virtual world, how do they think about really thinking about coming online. Many of them are off-line, whether it be retail or even a service-based business. Interacting in an off-line manner, how do they think about online, and that can be everything from interacting with their customers to their payments. And then we've been thinking a lot about how do they continue to grow and how do we help them grow their business. What COVID has done is really, in some ways, accelerated some of those trends, which many may have taken years to get to. I think they've accelerated and pulled them in to just a few months. And so if you can imagine a small business that was a retail store and working quite well, and all of a sudden with a shelter-in-place order had literally no customers able to walk into their store, they've had to scramble, pivot, be resilient and figure out how to sell online. Or if you are a service-based business or an accountant or bookkeeper thinking about how to service your clients, while you may have had that face-to-face interaction in the past when no one can leave their homes, you have to pivot to a virtual world. And so those are trends that we've been thinking about, we've been building products for, and again, we think probably have just been accelerated from this COVID time.

Got it. Got it. There was also the mention on the Q3 earnings call that there was quite a bit of detail offered on payment charge volume, number of workers on the system, number of companies running the payroll. How are those metrics shaping up as we wrapped up the month of May? Any changes with those trends, whatnot?

Right. Well, I won't give a mid-quarter update, but let me just reinforce what we shared at the earnings call, which is as COVID hit, it hit instantly. And what we saw from many small businesses is what I've referred to as just a paralyzing moment. They, again, suddenly didn't have customers able to walk into their stores or engage with them. And we really saw a few weeks of just a complete shutdown, just payments falling off, customers pulling back and really thinking about what they needed to do to be successful. Since then, we have seen that stabilization that Sasan mentioned in our earnings call, and we hope to see that continue going forward.

Got it. Got it. Got it. Have you seen -- I think you've talked about attrition having picked up in small business. What are the kinds of businesses that have been able to make it versus the ones that have not been able to make it? Any characteristics? I'm just curious.

Yes. So right now, what we've been impressed with is, obviously, some pickup, but for the most part, a resiliency in our base. And we look at it against different cohorts and different customers. I'd remind you that the majority of our QuickBooks Online customers are service-based businesses, and so the impact is a little bit unknown. But the good part of a service-based business is their fixed costs are, for the most part, relatively low, but they also still have had impact from customers. And so when customers pull back, revenue pulls back. And so I think what we're seeing right now is the most common challenge that we know small businesses face is cash flow. When COVID hits, there's an immediate hit to revenue, so they are managing their expenses as quickly as they can. Many are leaning into opportunities like the PPP program to be able to extend their runway as long as possible, but we're all sort of waiting to see will the economic recovery happen quickly, will customers get back, will consumer spending continue to rise, or will there be another dip and so forth? And so right now, the way I describe it when I talk to a lot of our small business customers is, they found a way to extend their runway as long as possible, but that runway is not infinite. And so they really need to get back to business and make sure that their customers are able to come in and pay for them. The last thing I'd say on this is the value of our ecosystem of products in QuickBooks and payroll, in particular, are that these are really the services that are helping them manage their business throughout this time. And so QuickBooks is really -- what we've seen is, particularly a feature like our cash flow feature, is something that our small businesses are in quite often, doing scenario planning, figuring out how much runway they have, what expenses they can push out in order to maintain viability. And really, this is the product that's helping them figure out what to do in a go-forward manner. So we've been very proud of offering the products and services that can help them manage through this difficult time.

Got it. Any other anecdote -- that's actually very nice. Any other anecdote that can really clearly delineate to us how critical Intuit QBO is to a customer during the time that we're going through?

Yes. I'll hit a couple of examples. One is the Paycheck Protection Program, which I mentioned before. This is a program that, if you were following in the news, was a tremendous government program to put dollars into small businesses. But also, many small businesses were not prepared for this. And we felt very fortunate that our customers, and particularly our QuickBooks Online and our payroll customers, we actually had all the data ready for them to be able to apply and get funding instantly, and then even just as important, now all of the payroll information and expense information as they will be applying for forgiveness from this program. And so we feel very confident that our customers are set up for success. And we've actually seen new to the franchise customers that have been what we consider nonconsumption, not using financial management software or doing payroll manually, come into the franchise, realizing, hey, they really need to be organized in a different way than they have in the past. So that's one example. Another is, again, we have been very proud of being that source of truth for small businesses where their invoices, as an example, come in to play. We have over 400 million invoices entered into QuickBooks every year. As many of those now get transitioned to online payments or electronic payments, we've been able to very quickly pivot our customers to being able to send electronic invoices and even be able to get access to their cash even faster. So we made our instant deposit product, as an example, free for our customers so that they could -- once they receive an invoice, actually click a button and get access to that cash when they need it the most. So very proud of what our products and services have done for small businesses.

Got it. Got it. Well, I also have -- I'm not sure if you have access to this chat channel where clients can ask questions in place of verbally posing it at an in-person conference. So there is one question that just came up. I'll just read it out loud with no attribution to the client. "The current situation has caused many SMBs to close, some of them permanently, and unemployment levels have picked up. How should we think about the way it might impact the business going forward?"

Yes. So we obviously are monitoring this quite a bit. There has been an impact to small businesses. We also know as we -- as there have been in almost every downturn, that this is a time when small businesses are born. It's when self-employed, when the question mentioned unemployment, when folks that are unemployed are looking at ways to feed their families and gain income, and they will leverage the platforms that are available to them from a self-employed standpoint. And so we actually feel like we are doing what we can, as I described earlier, to help our existing small customer -- small business customers manage through this time and hopefully come out stronger. And then we'll be there for the new businesses that are created and born out of this time as well as the self-employed that will pivot to these platforms. So again, we're staying focused on the products and services that will help small businesses survive, and that's how we'll manage through it.

Wonderful. I want to just talk a little bit more -- or have you talk about QBO Advanced. Obviously, big value uplift. How are clients able to justify the higher price of paying for this? Maybe it's relative to the competition and what the competition is offering in terms of feature functionality. Can you just talk about what you're seeing with adoption for QBO Advanced? How does one justify the price delta? And who are you actually incrementally competing against or displacing if QBO Advanced is to be successful?

Yes. So this is -- let me set the context. So traditionally, we have really been serving the smallest of small businesses, the self-employed and small businesses up to 10 or so employees. And what we were seeing is many of our small business customers who were on the platform, had their data in, loved the interface, but were really outgrowing the features and functionality that we had, were sort of forced to leave the franchise. And we could even see the precursors of them leaving the franchise because if you look at that cohort previously, they had some of the lowest PRS score, product recommendation scores, that we had in our franchise because they just -- the product just wasn't built for them. It wasn't helping them from an efficiency standpoint. So when we launched QuickBooks Online Advanced, we really focused on that cohort, really thinking about how do we help them expand up to, say, 100 employees, and built the features and functionality. And we're still early in the journey and still building out the road map. But even now, we've built the features and functionality that allows them to see their business in a different way, have advanced reporting for things that are relevant to them, be more efficient in high-volume invoicing, which just wasn't important to a smaller business but is critical for a mid-market business. And so just by building out the features and functionality and adding in the customer support that they expect for a mid-market company, we completely flipped around the PRS. And actually, the QuickBooks Online Advanced product is now one of our highest PRS products, even with the price point being 2x our highest previous SKU. And so we actually feel very confident that our focus on delighting customers, our focus on delivering their needs are keeping both existing customers that, again, know our -- and love our product or new to the franchise customers that are coming in. We will delight them. And to your point earlier, the price point in comparison to competition is quite disruptive. And so traditional solutions can be in the $20,000 to $40,000 range, not even including the cost -- the migration cost of moving off of a QuickBooks and getting up and running and having to learn a new system. And so we feel very confident that our $2,000 price point actually has a disruptive place in the market, and we'll just continue to focus on building out features and functionalities to continue to delight that customer base.

That's great. Any anecdotes you can share with this, Alex, on certain customers or 1 or 2 that have implemented QBO Advanced? And what are the significant savings or productivity benefits they're getting from QBO Advanced? Just curious.

Yes. So it's a great question. And part of it, the conversations and the stories that I hear most often from those advanced customers are around our strategy of not just up-leveling the QuickBooks product but really building an open platform. And so the competition in this space has done a very good job of building what I would call more of a closed ecosystem, a complete end-to-end offering, and that's how they justify their increased price. And for many of them, their concept of mid-market is the 100-employee to 1,000- or 2,000-employee range. But you buy a "one size fits all" package. What we've heard, particularly in this post-COVID environment, is our customers -- our Online Advanced customers love our strategy of the open ecosystem. So they get the best-of-breed QuickBooks Online Advanced. They get our payroll, our payments, our capital, our time tracking products, all of which expand up and serve their needs very well for their mid-market. But then they're able to bring and access their best-of-breed CRM product or project management product that plugs into QuickBooks and works well for them. And so it makes them feel like the product is rightsized for them as well as cost-effective. They're not overpaying for feature and functionality that they don't need. They're paying for exactly the products and services that they want. And particularly in now a very cost-conscious world, a disruptive price point plus an open ecosystem that allows them to pick and choose the products and services that meet their needs, we have found that they've been delighted with that as an option.

Got it. Got it. With respect to COVID, there's been some talk of removing the limits in the standard QBO version. And if that's the case, could there be some cannibalization of Advanced in the near term, but also could be a net positive overall for the business? Any thoughts there, especially as we get past COVID? Hopefully, when we do.

Yes. And just to be clear, what we did was very true to our principles of managing through any downturn for our customers as we put our customers first. And so as I mentioned before, in this moment of uncertainty and paralyzing for our customers, we wanted to make sure that we were taking care of them and not harming their ability to manage their business. And so what we have inside of QuickBooks Online is very similar to what we've done in Desktop for years. And we brought it over to our online product, which is, as you continue to use the product, as you continue to grow your business, there are certain thresholds that when you hit them, it makes sense for you to upgrade into QuickBooks Online Advanced, and we move you up into QuickBooks Online Advanced. During COVID, what we did was we paused those automatic upgrades because we wanted to make sure that customers weren't worrying about not using the product. We knew how critical QuickBooks was going to be for them for their survival, and so we wanted to make sure that, that just wasn't even part of their mindset of, "Am I going to use this product? And if so, am I going to get a surprise in my bill that I'm not going to be able to deal with right now?" And so we paused that. It doesn't mean they didn't use the product, and it doesn't mean that when we turn that back on, they won't be in QuickBooks Online Advanced. It was just doing the right thing for customers at that time. And so again, we've been true to our principles of being customer back first and helping them through this.

Got it. If you could go back to transcripts from, I don't know, 5, 7 years back or so, I would in a very friendly way harass Brad Smith in these conference calls, when is payroll attach, payment attach, particularly payment attach going to continue to go up. And he would say, "Mark my words, attachment of payroll and payment will go up." Payment used to be very small back then. He said at some point, he thinks that number will be very large. But lo and behold, here we are having this conversation. So Brad, if you are listening, kudos, you were right, 5, 7 years back. It took a while, but we're here. What is driving the increased attach in payments and payroll? Even if you were to exclude the COVID impact, there's been a very nice uptick there. And therefore, the -- your revenue growth up until COVID has outpaced unit growth rate? It used to be exactly the other way. I think Jerry Natoli will remember me asking incessantly when this is gap going to close because the unit growth seemed to be higher than revenue, but now revenue is outpacing units. What's happening here? And how sustainable is this?

Yes. So we -- this is about, for me, investment in the product and where we focused our time and attention. If I go back 5, 6 years ago, we had a complete focus on ensuring that we built the best financial management software and ensuring that QuickBooks Online was going to meet the needs of our customers. And then 3 -- 2, 3 years ago, we really started investing heavily in our payments and payroll products as well as building out capital as well as the acquisition we did with TSheets to have the best-in-class time tracking solution. And if I just look at payroll and payments, they are so critical to the ecosystem. The advances that we've made in the product are now, in my opinion, world-class and the best offerings on the market for small businesses to help them get paid faster and hold on to their money longer, which is exactly meeting the needs and the most critical needs of cash flow. And so in payments, innovations like instant deposit, the improvements we made in invoicing, the improvements in just getting paid faster, gets money into their pockets as fast as possible. And on payroll, we have innovations that no one else has in terms of being able to hold on to your money longer, being able to run your payroll faster. And that concept, it seems silly, but that concept of being able to hold on to your money until the same day that you need to run payroll, even outside of the COVID environment but particularly in this time when cash flow is so tight, is a massive innovation where other solutions would require you to bring dollars out 10 to 14 days in advance of running payroll when you just don't have those dollars available. This is a massive innovation. And so I would point to just our deep investment in the product and then the integration of the ecosystem together. So again, the time tracking product being able to be a best-in-class time tracking solution that in one click automatically flows into payroll means you're not keeping track of time cards. You're automating your system. So that whole ecosystem coming together is where I think we're really delighting customers.

Got it. I do have a couple of more questions from our clients. As always, these are very sharp -- smart questions, and I'm going to sound like I'm the smart one asking the smart question. Considering these are very unusual times of low visibility and many companies are willing to give some color on the shape of the recovery, is there anything you can tell us about the last month, that is the month of May, generally and especially about gross adds or churn in the QBO business? Again, it doesn't have to be new information. It's already something that was discussed on the call. But since we have you, the point person on the QBO side, anything more that you could drill into with respect to these trends in the month of May that this client is asking for?

Yes. So I will focus on the first half of May, which is where we discussed in our last earnings. And the trends that we started to see were really a stabilization coming out of April and late March, where we saw a pretty significant decline. But what we saw going through those first couple of weeks of May are a stabilization in the companies running payroll, which is what we want to see; total number of employees being paid stabilizing; time tracking in the same place, which is a precursor to payroll coming back; charge volume growth in our payments, which had declined significantly, now coming back and stabilizing in the first part of May on both online and desktop. So again, each of those are -- have been positive signs, as well as gross new subscribers starting to come back in some of our markets. And so all of those positive signs through the first couple of weeks of May.

That's very encouraging. Another question, could we understand -- from Chriss, how he views the desktop business? Why is this so resilient despite the transition to the cloud? We understand some of this is because of desktop enterprise, but nonetheless...

No, it's a really good question, and let me unpack the strategy for desktop because...

See, I ask you only really good questions.

Yes. No, it makes you sound amazing actually. It makes you sound amazing. So let me unpack the desktop strategy because it's an important part of our ecosystem. This is a franchise that's over 25 years old, and we have customers that many of which have started their businesses on QuickBooks Desktop and have thrived and run their business for 10, 15, 20 years. We have continued to invest in the desktop product. It is a fantastic product that serves our customers well. And we continue to release the product every year, and we continue to add feature and functionality to Desktop. We believe and invest disproportionately in the online product. And most of our new customers, the vast majority of our new customers come into the online product. But we are not abandoning our Desktop customers. And we -- when we talk to them about their intent to move to online, their standpoint is, "I have learned this product, this Desktop product for a decade. I'm going -- and it works perfectly well for me. I will continue to run it until there is such a pull to the online that I need to move there because of a certain feature or functionality or a mobile visibility or something that I need. But for right now, I am very happy, and relearning a system is just not where I want to spend my time and energy right now." So we are not pushing customers from Desktop to online, but we are absolutely investing in our online ecosystem to ensure that when that customer is ready to move, they have the best destination and the softest landing, and we see a good number of customers every year migrating from Desktop to online. But again, we love our Desktop customers. It's resilient because it's a great product that we continue to invest in, and it's a core part of our business.

Maybe it's time to think of a new name for Desktop. It's so '90s. Just wondering. Maybe -- I don't know. Probably I'll get but that's...

If you want to come be our marketing leader, we're happy to interview, but you'll have to come up with something.

I have made 2 contributions to the software industry. Only 2 contributions. Maybe there are, but these are 2 things that I distinctly remember. Remember we have this IaaS, SaaS and PaaS. Guess who came up with that? That's me. My associate and I were sitting down in 2006 or 2007 trying to come with this cloud thing. We didn't call it -- we called it on-demand. And we came up with, say, "There's apps and there's infrastructure and there's a platform. So how do you translate the old stack and databases' operating system and applications into the new stack?" So we came up with that. And the second contribution, this is also for real. Oracle 12c, the c -- all databases used to be always called g or i or whatever it is. So I told them in 2012, "The whole world is giving you grief because you're not part of the cloud but yet your database is powered by the biggest cloud company. So you should think about calling it 12c." He called me back later and said, "You know what, we're going to take you up on that. We're going to do that."

There you go. There you go.

So I don't know what else I've done, Alex, but these are...

That's pretty good. Call it a day.

Yes. And also, I misrep -- when a client said "Ask Chriss", they meant your last name. They should have said, "Alex", but maybe.

Oh no, no worries.

This is a question that's from us. We did a survey of accountants in the U.K. It didn't seem like there was a lot of pricing power, but accountants seemed like they're willing to pay more for new features and services. What are things -- maybe I'm not going to ask you what products do you plan to launch, but what are things that you're not doing for accountants today that you could see yourself doing for them in the future?

So in the U.K., there's some interesting dynamics. One is, obviously, with making taxes digital, we are now seeing a real requirement for companies to move online. Our focus for accountants is the same in the U.K. as it is in the U.S., which is how do we make them as efficient as possible? They are doing a lot of manual repetitive tasks throughout the day. And so if we can do things like bring data in to the product in an automated fashion for them, whether it's receipt capture so that their customers can just click a receipt and have that OCR then automatically input into QuickBooks for them and then automatically, using our AI, be able to match that to transactions that are already there, that is a massive, massive timesaver for accountants and allows them to then serve more clients. And so we actually believe that there is pricing leverage in the U.K. in particular, and part of that is because we're continuing to improve efficiency and allowing them to serve more clients in the time that they have during the day. And so again, we will continue to focus on features and functionality that give them time back so that they can serve more clients.

Got it. My final question for you, Xero, X-E-R-O. I've always wondered why a company that sells accounting software would call itself Xero, but that's besides the point, maybe some marketing there needs a little bit of a push there. What are your thoughts on competition with Xero? They seem to be coming in and out, in and out of the U.S. market. Actually, they have been making a big push [ dated ] 10 years back, 5 years back. What do you make of Xero's push? Is it just 0?

Yes. So well, look, we still see the -- our #1 competitor as nonconsumption. It's the customers that are still using a spreadsheet or pen and paper. And again, through our combination of making our DIY QuickBooks platform as easy as possible or for the ones looking for an assisted service, leveraging our QuickBooks Live product so that they can allow us to do the bookkeeping for them. Those are really our focus. We love competition coming in. To be honest, I think the last few years and even with the COVID response, the world has really awoken to the fact that small businesses run a massive part of the economy. And so the more people that are focused on helping small businesses end-to-end is good for us in our leadership position and good for small businesses. And so we'll stay focused on building our products and services to the best that they can be and helping small businesses be as successful and rebound from these difficult times and thrive going forward.

So what you're saying is all is live and well, and it's not a zero-sum game?

You are a marketing genius. I like the way you put it.

I'm not. I'm not. I've been -- software is such a fascinating industry. I started covering it about 25 years back, and you could either go down the rat hole and try to be very technically-nuanced and detail-oriented or you could create analogies. And I always find that, although I'm an engineer myself, I was a terrible engineer. I could not program a lineup code, but what engineering taught me was to think of a business in terms of mathematical equations that really waft and wane and the variables change, so beautiful, especially given that I also dabble in music. I think of the interplay with music and software, the quantitative and the qualitative is just simply the most fascinating thing. So I try to come up with analogies, then I try to -- just try to distill thinly complicated concepts. On that note, if Sasan is listening to this, Sasan, congratulations to Alex in order for a brilliant presentation. And a big fan of Sasan and the beautiful change in regard to the company is able to accomplish and just a terrific company. We've always been a big fan of the company and so glad that we're able to host you on this webcast. Kim, I know you're on, any final words you have to say to us or just say goodbye, take care, if you're on?

I'm here. Thank you so much, Kash. Thank you for having us.

All right. Alex, once again, thank you very much. It's very nice to meet you. And I hope that...

Well, thank you, Kash. It was a pleasure.

We can meet you in person. Absolutely. Have a great day, everybody. Thanks to our clients for tuning in. We had close to about 80-plus clients tuned in, which is fantastic, given the time of the day on the East Coast. Have a great day, everyone, and stay safe, and all the best for investing success in 2020. Take care.