Intuit Inc. (INTU) Earnings Call Transcript & Summary

Okay. And we are live. Welcome back, everybody. Again, I'm Brad Zelnick with the software team here at Crédit Suisse. Welcome for Day 2 of our Annual Tech Conference, typically in sunny Scottsdale, this time virtually delivered to your office or your living room, wherever you might be. And for this session, truly delighted to be joined by Michelle Clatterbuck, CFO of Intuit. Michelle, thank you so much for joining us.

Thank you, Brad. Appreciate it. Great to be here.

Awesome. So the format of this presentation is going to be a fireside chat. I've got a number of topics to go over with Michelle. And I don't believe we have any Q&A, but if anybody wants to shoot me an e-mail, I will try to work -- I'll keep my eyes on my inbox and try to work it into the conversation.

But Michelle, just maybe to start, I wanted to ask about the pace of innovation. I mean one of the things we took away from this year's Analyst Day that I think just continues to remain underappreciated by investors is the pace of innovation at the company. Intuit's always been an adaptable company. There's so many great things I could say, but adaptable yet down by what you could term fairly predictable end markets of tax and small business. Clearly, in 2020, nothing's been predictable. But this year alone, you've announced the Credit Karma acquisition for around $7 billion. You've managed very nicely and grown globally through a pandemic. Intuit's excelled in a very unusual tax season, I think unlike one that at least I've ever seen in my lifetime. You've rolled out from scratch and processed over 33,000 PPP loans. You've extended and grown your services with more Live offerings, QuickBooks Cash, QuickBooks Commerce, the list goes on. So any one of these things would be considered a big deal, I think, in a normal year. So my questions. Number one, you've been with the company a long time. Am I being fair? Number two, what, if anything, has changed from a culture or process or even resource and technological perspective to allow you to embark on all of this and succeed on all these initiatives simultaneously? And then maybe third, and I know I'm throwing a lot at you, but the general margin structure seems to be improving despite all of this investment. And I think as we think of platforms with inherent leverage, are there other business models you'd encourage investors to think about with regard to steady-state margins? Again, I'll take a breath, but a lot out there, but there's a lot happening to talk about.

No. Thank you and appreciate the kind words. So first of all, the first question and part, yes, I have been with the company for a long time. I've been here for just over 17 years. I started in payroll as a Senior Manager and worked through the payroll business and professional tax business and consumer tax and spent some time in small business, too. So it's been a great chance for me to really see the business. And so I would say that, yes, your assessment is fair, but it's also a great question, as you said around here, what's really changed? I would say we like to think of ourselves as being a 37-year-old start-up. The secret to kind of the success that you talked about is really our willingness to be able to disrupt and reinvent ourselves over time. We have learned to fall in love with the customer problem, not the solution. And this has really been what our founder, Scott Cook, taught us years ago when he founded the company in 1983 and continues to teach to this day. And so in the last 2 years, we really galvanized the whole company around our mission of: to power prosperity around the world. Also, our big 2025 bold goals that we've established and our AI-driven expert platform strategy. And so our innovation is now focused on the 5 Big Bets, kind of like our priorities that we declared over a year ago. And this focus has really been the key to accelerating innovation for customers even in this very challenging environment we've seen with COVID. And then lastly, I would say, we're increasingly innovating at a platform level. And this allows us to develop a capability and then implement it across several different offerings and bring things to market much more quickly. And that leads to, I think, your third part of your question around our margin structure and how we're seeing that improving. Our financial principles have been for a long time and remain the commitment we have around growing revenue double digits, growing operating income faster than revenue. And we expanded margin by over 1 point last year. And this year, our guide would be that we would see about 110 basis points of margin expansion prior to the Credit Karma acquisition. And so as we evolve to become an AI-driven expert platform, we really do see opportunities across all of our expense lines for leverage, being able to really see new sources of operating margin expansion as we look forward to the years ahead. And so we haven't given any specific longer-term margin target, but we do see that there are opportunities, whether it be in technology, being able to increase the velocity of development; in customer success, which is really scaling a common customer success platform so that we can better serve customers across all of our products and then also in go to market. So leveraging a common infrastructure there so we can personalize and really target customers in a much more effective way.

Thank you so much for a comprehensive answer to a long-winded introductory question. I appreciate that. And I will just say, I've always admired. I've covered the Intuit stock for many years. And the operating discipline, the management operating system, if you will, and just reflecting on the leaders from Scott, to Bill Campbell, to Brad, to Sasan today, yourself, Neil, I mean, I think you've just done a phenomenal job. That said, if we can turn maybe just to the environment, Intuit, I think, sees a lot of the economy through your SMB exposure. Can you share the latest on just the real-time impact of COVID-19 through both U.S. and international lenses in terms of what you're seeing? It seems like you have more confidence about stability given your most recent guidance. Can you help us unpack that a bit?

Yes. We continue to see improving trends across many of our offerings. And many of the QuickBooks indicators are getting closer and reaching pre-pandemic levels. So it really does highlight the resiliency of our business model. Customer acquisition with QBO, with QuickBooks Online, is back to pre-COVID levels. Charge volume and the number of companies running payroll is still a few points below pre-COVID levels, but have made a lot of progress on that. As you can tell by the Small Business and Self-Employed Group revenue guidance of 8% to 10% for the year, we're tracking more closely to the high end of the 3 scenarios that we had provided on our Q4 earnings call. So that's encouraging. But that being said, there just continues to be some level of uncertainty for small businesses as the pandemic runs its course. But we are more confident in how our business is performing in the current environment. And so that's why we provided the guidance on our earnings call last month. The good news is small businesses were in great shape heading into the pandemic after experiencing a decade of economic growth and strength. One metric is QBO businesses, the median net bank deposit level. That was hit hardest in April and May and has since recovered and is more than halfway back to pre-COVID levels, but it's still a little bit lower than prior year levels. You did mention international, and so I'd just touch on that briefly. On the international side, we saw online revenue that grew 51% in Q1 of this year. So we're seeing strength in the U.K. and Canada. And even some emerging markets like Brazil and France are beginning to accelerate in this environment. But we're seeing a network effect in some of these markets. And that means that we should see even more growth coming forward.

Awesome. Maybe if we could, Michelle, dig into tax a little bit. And I know at Analyst Day, it's always a time to reflect back on the prior season. And if we listen to what you've said, Intuit saw great improvement on all tax funnel metrics from traffic all the way through to retention. Can you perhaps take us through a quick recap of tax season? And then how it progressed from your perspective? How did everything turn out with regards to sort of the expectations that you had and how they evolved as the season unfolded?

Yes. We had a very strong tax season in a highly unusual environment. We always say every tax season is different, and this one definitely, I think, took the cake. But we had revenue grow 13%, which is above our long-term expectation of 8% to 12%. So we executed really well against our strategy to expand our lead in DIY, to transform assisted and to disrupt consumer finance. And we saw double-digit growth in new customers across underpenetrated segments like Latinx, self-employed and customers with investments. And as we continue to extend our lead in DIY, we're innovating through data-driven personalization and creating effortless experiences for consumers. It was our third season with TurboTax Live and went really well. We're continuing to focus on our strategy of transforming the assisted category. And now more than ever, customers are looking for virtual solutions of all kinds. And so our platform is designed to help all customers file their taxes with confidence and ensure that they get the refund that they deserve. With TurboTax Live, we grew customers nearly 70% year-over-year. And nearly 70% of new TurboTax customers that use Live came from an assisted method the prior year. And that's higher than we see in TurboTax Online. And also our TurboTax Live retention rates for new filers were 67%. And so that's the highest that we see in our franchise. So overall, a strong tax season even in the crazy year that it was.

Yes. Hats off to you. Maybe just to nitpick a little bit. I think some investors would point out that total returns filed only grew about 11%, in line with the overall category, implying less share gains in a year where Intuit was structurally advantaged. How should we unpack the numbers there and think about growth in market share within DIY? Because I've always heard Intuit say that it's on you guys to drive category growth, right?

Yes. We're proud that we grew our share of total returns, and we had 11% customer growth this past season, which is the strongest in 4 years, while also growing revenue double digits for the third year in a row. It was a highly unusual season. And there is some significant noise in some of the numbers that were reported due to stimulus filers this year -- this past year. And while it's definitely our goal to gain share within the DIY category each year, we're pleased with the 13% consumer group revenue growth that we delivered. Excluding stimulus, stimulus-only filings, we estimate that the do-it-yourself category share grew over 2 points this season, which is the fastest in the last 15 years. And as you said, as the champion of the DIY category, we're particularly proud of this outcome. It's the largest driver of revenue growth for us. But we also estimate that our share of the category was flat, so excluding stimulus-only filings, while our share of the total tax prep market grew over 1.5 points. And so as we pursue the opportunity to transform the assisted category more and more as we look at the 86 million people that file within assisted method, we are really increasingly focused on looking at total returns and measuring our share of total returns.

Got it. That's very helpful context. Michelle, I've got maybe 2 more questions around tax and then we can move on, if that's okay. 70% year-on-year customer growth for TurboTax Live is certainly very impressive, demonstrating the progress in transforming the category. I guess, how should we think about additional levers in this side of the business on the top line? For example, we've seen some select beta tests out there on a full-service offering. Can you maybe tell us more about that and other things that are cooking in the kitchen, so to speak?

Yes. We see a large opportunity to transform the assisted category as part of our strategy for the consumer group, as we really look at the, as I mentioned, the 86 million people that file using an assisted method. And so having a full service capability in TurboTax Live is something that has been on our road map for years. And this is something that we're planning to launch this coming season. We're going to share some additional details very shortly when we launch our overall product lineup for the next season. But as we demo-ed at our Investor Day, we think that we're in a unique position to be able to solve customer problems with the Live offering. And after many years of experimenting around how we can use AI to improve the experience on both sides of the network for the experts and consumers, we just believe that there's a better way than just replicating what's done offline. And so using technology to really be able to drive this experience, we think, will be great for consumers as well as for the experts.

Got it. Makes perfect sense. Maybe my last one on tax is just around tax legislation. Can you speak to any potential legislative changes, impacts to the business? I know this has been an ongoing conversation for many, many years. But especially under a Democratic administration, there's been no shortage of speculation here. Any thoughts to share with investors?

From our standpoint, we have a very long history in the tax business, and that long history has been of being able to work with folks on both sides of the aisle and also across the various agencies that are also involved. And so we're going to continue to do that going forward while doing the best to solve our customers' needs regardless of the administration that happens to be in power at the time. As for any legislative changes or impacts that may come out, especially those that come out closer to tax season, our team has been pretty good at getting any of those changes into the product very quickly, and the development team really has a good history of successfully updating and getting those things out so that the tax code and the product is correct. So we feel good about that.

Got it. Maybe if it's okay, let's maybe move on to Small Business. Is that okay?

Great.

All right. Cool. Maybe just from a pricing perspective, one of the things that surprised us this year, especially on QuickBooks international, was that ARPC, average revenue per customer, was up so significantly year-on-year due to maturing products and less discounting. How do you approach price or discounting as a lever in driving growth? And how has that changed with differing levels of maturity in different end markets?

Yes. In FY '20, we made a deliberate adjustment to our go-to-market strategy, which was including less discounting to focus on higher-value offerings and improve platform monetization, which is what drove Online Ecosystem revenue growth of 31% on subs growth of 12% last year. We have a pricing for value philosophy, but for now we have paused price increases in the current environment. And as we move back to a more normal environment, we would expect again to continue to align our prices and to reflect the new value and innovation that we're adding to the product. Pre-COVID, we were also being much more thoughtful about how we were discounting, especially in the international markets, and that has continued and will continue. We've built a robust small business ecosystem on our AI-driven expert platform, and that delivers the right solutions for a wide range of customers globally. We've also opened new opportunities for revenue growth by knowing who we serve, how we serve them and what we serve them with, with our bets in areas like virtual expertise, the mid-market and also omnichannel. And so long term, we expect customers to grow 10% to 20% and ARPC, average revenue per customer, to grow 10% to 20%. And that's really how you can think about the algorithm to drive 30%-plus Online Ecosystem revenue growth over the long term.

Got it. That makes perfect sense. Michelle, maybe just one on QuickBooks Commerce. This is the newest offering for QuickBooks customers to sell across multiple sales channels with integrations to ensure product listings, orders and having their data remain synched across these distribution channels. Can you just help us understand what other solutions you're displacing or replacing here? And are there any encouraging early signs that you're seeing?

Yes. One of our Big Bets, our priorities, is to be the center of small business growth. And one important element of this is to better serve product-based businesses. These businesses need a better way to manage sales and inventory across multiple channels. 84% of product-based businesses selling in multiple channels today, they actually reconcile inventory using pen and paper or spreadsheets. And so that's actually what we're really replacing. These customers are trying to sell on multiple channels like Etsy or Amazon and others so that they can grow and bring in more customers. And getting started on these channels is really easy. But then coordinating their business across the channels, understanding profitability of customers, reconciling and managing inventory is just a lot more difficult. And 50% of small businesses are actually afraid to add another channel because of the operational complexity. We have over 1 million product-based businesses in our customer base now. And so we believe that we have the opportunity to serve many more of these with QuickBooks Commerce. We're creating an open platform commerce solution that helps small businesses move to e-commerce or manage their existing omnichannel strategies. Small businesses will be able to use QuickBooks Commerce to connect any of their key tools and services and then also see a true, holistic view of their business. And so it's much easier for them to understand which channels are actually profitable. Our recent acquisition of TradeGecko is just one piece of this commerce solution. It has critical inventory, order management capabilities that we needed. And so as the acceleration of e-commerce and omnichannel continues, this is just going to be even more critical. Now we did just launch QuickBooks Commerce in September. So we're just getting started in this. We're in the early innings, but we are encouraged by the customer interest that we're seeing.

Right into Q4 and the holiday season.

Yes.

I'm imagining it's going to be exciting. Maybe just with respect for time, if I can pivot to QuickBooks Cash, QuickBooks Capital, amazing job on PPP loans that Intuit has made this year. Thank you for everything Intuit's done to help small business owners out there. Several questions, maybe one, should investors be concerned that Intuit maybe becoming a bank as you lean more into fintech? And then I've got some others to follow.

No. We've been asked that a number of times. But to be clear, we have no plans to become a bank. That being said, we do see a significant opportunity to solve many of the financial problems that our small business and consumer, our customers also are facing, but we have no plans to become a bank.

Got it. And maybe along with that, how do you think about balance sheet utilization when it comes to some of your newer offerings here? Are there any constraints that we should keep in mind?

Yes. I would talk about QuickBooks Capital and QuickBooks Cash. So when first on QuickBooks Capital, when we started lending with QuickBooks Capital, we did use our own balance sheet so that we could more closely control the experience and really get some learnings that we were trying to get. But over a year ago, we announced that we had signed an agreement with a blue chip financial services partner for a $300 million credit facility to be able to scale the direct lending business further. And so we're able to leverage over 26 billion data points that we have within QuickBooks to be able to help provide loans to small businesses that they may not have been able to qualify for anywhere else. And so our risk models are able to use all those data points to make the lending decisions. With QuickBooks Cash, we have a bank partner that is helping us provide that product. We don't believe the value we can offer is by being a bank ourselves. But instead, it's really by providing an account that helps small business owners manage their finances and having money all in one place.

Got it. And maybe just to put this in context, is the goal for these to become material profit drivers like payroll and payments or should we think about them as solving pain points around the ecosystem and being more QuickBooks on-ramps?

Yes. With QuickBooks Capital, there's a revenue opportunity here, but it's still relatively small when you compare it to something like payroll or payments. It's really in service to helping our customers get the capital they need so they can grow their business as they may not qualify anywhere else. And so this really then helps with retention over time. If I think about QuickBooks Cash, there's a small monetization opportunity associated with the debit card that we're offering. But this actually isn't the primary focus. We expect that QuickBooks Cash will help increase customer adoption of existing services like payments and capital given the strong benefits that the integrated usage provides, and then customers will benefit by using the full ecosystem to really manage and grow their business, saving on banking fees and earning interest on their balances and being able to move money faster and paying employees. And just saving time overall with managing your money because it's all in one place.

Got it. Michelle, with respect to time, I think we're almost at the end here. But maybe if I could squeeze in one more on QuickBooks Live or QBO Live. Can you just help us think about QBO Live pricing and usage because this seems different from TurboTax Live in terms of frequency of usage and peak intensity. What are the early learnings and feedback here? And how do you think about attach rates, price points versus existing bookkeeping solutions out there? And do you need to hire professionals to do this in the same way that TurboTax Live has, I think it's 2,000 employees?

Yes. So we expect to see an accelerating shift to a virtual world. I mean we're seeing it now. And so post-COVID, we just think we're going to continue to see that. We have an opportunity to provide customers access to expert advice virtually on the platform, just like you mentioned, with TurboTax Live. And so we have that for QuickBooks Live. We've identified a couple of opportunities to really help solve different customer problems, setup and also ongoing help and advice with bookkeeping. Last year, we launched a setup SKU to help small businesses get up and running and get confidence on QBO because this really solves our customers' biggest main points. We know that 25% of new to the franchise customers who either abandon or cancel, they say that it's because they didn't know how to get started. So that's a big help. And we've learned that the setup offering that we have is a great way to introduce customers to the benefits of QuickBooks Live. And then just over about 10% of those customers who complete setup SKU end up upgrading to QuickBooks Live Bookkeeping. And then just real quickly, the expert interest. It's been strong. We have over 600 experts on the platform today. And similar to TurboTax Live, the learnings we've had there, we're working on ways to continue to automate and increase efficiency so that the experts can really focus more on value-added activities.

Well, with that, I think we're out of time. Michelle, it's always great to see you, even better to see you at the Crédit Suisse Tech Conference. So thank you so much for spending the time with us. This was really helpful.

Thank you, Brad, really appreciate it. Thank you for having me.

For sure.