Intuit Inc. (INTU) Earnings Call Transcript & Summary

Thank you, everyone, for joining us. My name is Keith Weiss. I run the U.S. software equity research effort here at Morgan Stanley. And very pleased to have with us from Intuit, CEO, Sasan Goodarzi. You got it -- on the third try, I got it right. Before we get started, a brief disclosure from our side of the equation, for important personal holdings and research disclosures, please see the Morgan Stanley website at www.morganstanley.com/researchdisclosures. So Sasan, thank you so much for joining us. It's great to have you again at our TMT conference and have you here live.

I want to start the conversation at a high level. And one of the things I think investors underestimate about what's going on in Intuit, and particularly since you and Michelle had taken over, is the evolution of the Intuit, sort of what had been a separate kind of SMB portfolio, what had been a separate consumer portfolio, into something that's more than that. It's a tax financial management platform, and there's so much more like linkages within that. Can you talk to us about the broader platform strategy? And what intuit looks like now, and what you guys are aiming Intuit to look like in 5 years?

Yes, sure. First of all, it is great to be back in a face-to-face environment. I've absolutely missed it. To your question, I think we are a very different company today than we were 3 to 5 years ago. And we are different in context of we have really shifted the company from being a platform company focused on tax and accounting to a platform company that really fuels the success of small businesses and powers the prosperity of consumers. And that just drives everyday benefit, everyday engagement. It gives us a chance to grow the company in ways that we never imagined possible. And it's exciting as we think about the impact that we can have on people's lives.

Got it. I mean if I take a step back, to me, Intuit feels cozier today than it had 3 years ago or 5 years ago. And I think part of that is within the long-standing businesses like tax and small business, leaning a little bit more into ARPU expansion. Part of it's you've been more aggressive with acquisitions and bringing on high-growth kind of parts of the equation. If investors are trying to sort of come up with a framework of how to think about Intuit growth on a go-forward basis, what are the kind of broad strokes of like a growth stack that you would put together in terms of how we should think about Intuit's sustainable growth on a go-forward basis?

Sure. Well, I'll start with our TAM. We have a $300 billion TAM opportunity. We have extremely low penetration. Depending on which segment you're talking about, it could be 1% to 3% penetration in a $300 billion TAM. And then the second thing is I would say we have a significant secular shift. Small businesses, and this was really inspired by COVID, there is a significant shift to digitization, creating a virtual environment, moving to online and omnichannel. And then when you look at consumers, on average, based on the analysis that we've done, consumers are using 4.5 fintech apps today versus just 2 several years ago. So when you put the formula of large TAM secular shifts and then you look at our position, which is a shift from we're just doing tax and accounting, to now, as a consumer, you can connect with financial products that are right for you, we can help you find ways to put money in your pocket, we can help you get your taxes done, we can give you advice. And then when you look at small business, we used to focus on being the source of truth for your books. We're now focused on being a one-stop shop for you as a small business, and then serving new markets that we haven't served before, like mid-market. And just the combination of those things is really what's propelled our growth. And we think we're just getting started in terms of our potential as we look ahead.

Got it. Got it. So you guys recently reported your fiscal 2Q results. And there was a little bit of a bifurcation. On the small business side of the equation, it did very nicely, well ahead of contentions and the guide. Credit Karma is doing really, really well. I think it was 14% ahead of kind of consensus expectations. But the tax season is performing slower than the original expectations. Investors being what they will, they're focusing a lot on the tax season. So I thought we would start there. Can you talk to us a little bit about the shape of the tax season this year? And it sounded like to me, like even though it was a slower start to the formation of the tax season, you guys still feel really good. And you still think you're in a position that you're going to be gaining share fundamentally throughout tax season. What gives you that confidence that it's still going to be a good tax season for Intuit?

Yes, absolutely. For the 17 years I've been with the company, it feels like this is a conversation we have every year, where consumers start -- shift when they do their taxes later and later in tax season. And one of the things -- we have a lot of Dow points that we look at. We have a part of our business where we serve accountants, so we can actually see the activity with all accountants, and of course, we see it on the consumer side. And there's just -- and we also see it in Canada, where we also help people do their taxes. So there's just a significant slowdown in when folks are doing their taxes. The great news is you have to do your taxes by April 18. And based on all the Dow points that we look at and IRS data, we're actually gaining share in the early part of season. And I actually think we're in a position of strength because the more folks shift when they want to get their taxes done, with our platform, you can now do it yourself. You can get expert help on our platform, and we can actually do it for you on our platform. And we've got incredible scale. So it actually plays to our strength, the later shifts in the season. And our position is really great in the market with the platform capabilities that we have, and we'll be able to serve consumers when they're ready.

Right. And I think you mentioned the tax solution has evolved a lot over the past couple of years from one that was purely a DIY solution. And now you guys are blurring the lines between what was DIY and what is assisted by enabling people to get that help that they need, get that assistance, but from their own home without having to kind of leave your chair. And at the most recent Investor Day, you kind of shifted the growth equation a little bit on TurboTax. I'm assuming it's like now, there's more of a focus on ARPU expansion, less of an owness, if you will, on just category share within DIY. Can you talk to us about the equation for growth now that you see going forward for tax?

Yes, absolutely. First of all, for consumers that do their taxes, the biggest problem that they all face is confidence. They want their largest tax refund, and they want to have confidence that they've done it right. And I start there because when you think about our platform strategy where again, you can do it yourself, you can get access to help, or we'll do it for you. It creates a halo effect of confidence for all consumers. Within the assisted category, there's about 10 million folks where there's churn. They leave the assisted category. We typically lose about 4 million TurboTax customers a year that go back to the assisted category. And all of it is because of lack of confidence. And so now with our platform strategy, you get the confidence because you know that there's an expert on the platform that's actually right for your situation, whether you've done crypto investing or you're self-employed or you're LatinX, we have experts that know your situation that can help. And I start there because ultimately, the way we keep score is our share growth out of the total returns. And because our biggest opportunity for growth is, in fact, those that today go to an assisted market, we have a big ARPU story where these are customers that pay a lot of money. They can get their taxes done with us. We'll do it for them from the comfort of anywhere they are in the world at lower cost than alternatives. And that's where we have an opportunity, not only to be disruptive, but it's also a great story for our ARPU, which is why the formula we communicated is hold us accountable to taking share. And we believe a lot of our growth will not just come from customer growth, but really ARPU growth because we're pursuing the assisted market.

Got it. Got it. And I mean, beyond just lack of confidence, sometimes, people are lazy, and they don't want to do their taxes. And now you have a full assist that you guys rolled out last year. This is going to be the second year of TurboTax live full service. Can you talk to us about how adoption of the live full service has been? What the expectation is for sort of ramping that up in terms of the second year? And then going back to sort of the ARPU conversation, kind of ARPU lifted, you guys see if somebody takes on that debt full live assist?

Yes. We love the fact that we now have full service on our platform because it actually plays a halo effect. When we were experimenting with full service several years ago, one of the things that we saw is where we were testing it, there was actually more interest in top of the funnel just because we had full service even if people didn't pick full service. So it's a very important part of the platform because what it does is it gives confidence to someone that even if they choose to do it themselves or if they choose to just get help with an expert, they know they can always just say, "You know what? I don't want to do it. Here, I'll give you all my stuff digitally. You get it done for me." So from that perspective, it plays a very important role in our portfolio. And so we don't just look at full-service performance, we look at the impact it has across all of our offerings. And it's really meeting our expectations. And in some ways, from a halo effect perspective, it exceeded our expectations. I think the second is all the work that we're doing, leveraging AI to automate. Expertise doesn't so much mean human expertise. There's a lot of work that we're doing with artificial intelligence so that we, in essence, have machines that are doing the work, that are actually answering the customers' questions so that our experts can really add value. And we also do a lot of the automation for the experts so that they're much smarter so when they need to engage, it's all value-added because this is really important when it comes to being able to scale. It's really important to be able to handle the volume the last 2, 3 days of tax season when everybody wants to do their taxes because they've delayed. We have the ability now to leverage our scale with automation driving a lot of the health versus just people.

Got it. And then when it comes to ARPU expansion, correct me if I'm wrong. I'm not quite sure I have this number right, but I think the average revenue per return for you guys last year was around $89. And you compare that to the industry average for assisted, [ $250-ish ], so there's still a lot of room under that pricing umbrella.

There is. That ARPU number that you just played back also includes those that do it themselves, where ARPU is lower. But it actually doesn't take away from the point that you're making. And that is -- and that's why our formula is such that we want to take share. But really, our biggest growth is going to come from ARPU because folks that need an assisted method are paying a lot more, and we can increase our prices, but yet still be very disruptive because of the service that we deliver.

Right. And you did make some changes to sort of pricing on the assisted categories. Can you walk us through the pricing changes that you made and sort of do they apply to the entirety of the tax season?

Yes. We made -- we did a lot of testing last year and just behavioral studies. And we learned a couple of things. One, if you look at historically the way do-it-yourself works is there's an early season pricing where you can, in essence, get your taxes done at a certain discount. And then towards the end of the season, we raise prices. What we learned is that it has no impact on the assisted market. Early pricing doesn't bring them in earlier because what they really care about is, "Do I have confidence that I can get my taxes done right? Do you have the expertise to help me?" So one big change that we made is we have flat price throughout the entire season. The second change that we made is we actually increased our prices with full service because we were so much lower than the marketplace, and there was so much elasticity to be able to increase our prices. So that's the second move that we made. And I would say the third, which is just to raise awareness and bring more people into the category, we also, for a certain period of time, are running what we call do your taxes anyway that you wish. If you're a simple filer, it will be $0. And that's creating a lot of attention, awareness to come into the category just to test what it's like to have help from an expert for the digital platform versus going into somebody's office. And so far, we like the results that we're seeing.

Got it. And then the idea is you're going to bring them in the door. And once you have them on to the TurboTax platform, the retention of that customer will be good over time.

That's exactly right, especially because they can bounce back and forth across the platform, because, again, we have all the capabilities that you need no matter however you want to get your taxes done.

Right. I remember when you guys first started talking about TurboTax Live and TurboTax Full Service, a big investor concern was the margin side of the equation, right? As software investors, anytime you mention people, you get nervous about gross margins and the cost to serve. And you touched on it a bit in the answer, but you guys have really, to a certain extent, cracked the code on applying automation and intelligently matching people where needed, but a high level of automation. And we haven't seen any degradation in gross margin. So is the net conclusion we should draw away that you guys have been able to provide these human augmented services but still have software-like gross margins?

Yes. I would say the short answer is yes. And in fact, this is something that we would never be able to do at scale if we didn't apply technology. So really from day 1, for us, this was all technology-led. It was all about how do we apply AI to not only automate things for the consumer, but automate things for the expert. And how do we learn from every interaction to actually make the machine learning capabilities smarter so we can do more and more of the work for our customers through machines, so experts really only get involved where there's really important value-added services that they need to engage in. And that's actually why we've been able to scale the way we have. I would say the other thing, Keith, is if you step back, we're also solving the same problem for small businesses with QuickBooks Live. And so the way we are building out our platform is truly a platform. Customer-facing, the experience may be different for a small business. It is different than it is if you want to get your taxes done. But behind the scenes, we have one platform, one set of services, one set of APIs. The way we're modernizing our entire operations, the experts we bring in, all of that is really a platform play at the company level, and that allows us to really be able to scale the way we're scaling.

Outstanding. I want to shift gears a little bit to talk about Credit Karma. FY '22, you guys are guiding for 35% to 37% growth in Credit Karma, well ahead of the long-term growth target of 20% to 25%. When you first made the Credit Karma acquisition, I think the strategic rationale was we have really good data that comes out of our tax business. They have a really good front end that engages subscribers really well. If we put these together, it's going to be a better offering. It's evolved a lot since then. Can you talk about the evolution of the Credit Karma strategy beyond just sort of working better together? But the new linkages that you've been able to create between Credit Karma and the tax business and Credit Karma and even the small business part of the equation.

Yes, absolutely. I'll start with we are obsessed with helping our consumers make ends meet and helping them save money and get out of debt. And as we refreshed our customer problems about 3 years ago, we also then went to, well, this is the problem we want to solve. We have to shift from just being a platform that solves tax and accounting to a platform that can truly help you save money, get out of that and truly make ends meet. And that led to a lot of work that we did whereby we acquired Credit Karma. Now there's 3 big things that are important relative to Credit Karma. One is Credit Karma is really a data platform with very powerful network effects. And the element of being a data platform is such that with the customer's permission, we have so much information and data that we can leverage to be able to then apply machine learning to deliver very personalized experiences for you, which is why partners, financial institutions, particularly, love to be on our platform. Because they ultimately see an opportunity to increase their conversion rate to drive their customer growth on the platform. And that, connected with the fact that we're integrating Credit Karma into our entire product ecosystem. We've integrated it into TurboTax. TurboTax is integrated into Credit Karma. We're integrating Credit Karma into our payroll product. And we're doing all of this because that actually allows us to truly become a home for members where if you're looking for financial products, credit cards, personal loans, auto insurance, auto loans. If you're looking to get your taxes done, we help you get your taxes done. We give you early access to your refund. We give you insights of how to improve your credit score. So we truly become now a platform that helps you power your prosperity versus just a tax company. And that is very similar to what we're doing on the small business side. If you think about what we've done with QuickBooks, it's really creating a platform where we've become the source of truth for your business, we're really focused on doing the same thing on the consumer side. And that's really what's igniting the growth that we are experiencing. And our view is we're just getting started in terms of what's possible with Credit Karma.

Right. Right. Can you talk a little bit more about sort of I think investors will understand the connections that you guys created between Credit Karma and tax. Can you talk a little bit about Credit Karma and small business? I know one of those connections is between kind of payroll and the cash accounts that are available in Credit Karma. I would imagine that small businesses, they need insurance, too, and they have those types of needs. Is there more of that to come on a go-forward basis of making this a platform for financial services for small businesses as well?

Yes. I love the nature of the question because especially the very small businesses that we serve, they also have personal needs, which is help make ends meet, to get out of debt, to save money. And we have a huge opportunity, not only to help the small businesses, but also the consumers that they serve. And that's where we created an ecosystem, in fact. So for us, it's just sequencing. Right now, it's really making sure every TurboTax customer has the ability to put their refund on a Credit Karma money account. They get 5 days early access to it, and then we open up other benefits for those consumers with Credit Karma. So that's the first priority. Second is what we talked about a moment ago, which is payroll, integrating Credit Karma into payroll so you can get early access to your wages. But we do see, and we have a vision for how do we help every small business, how do we help every consumer to the small businesses we serve with the benefits of Credit Karma and really leveraging the data on the platform, with our customers' permission, to be able to do the product integration so they can actually get the benefits of Credit Karma. So that is in our long-term vision. But right now, it's all about the consumer side.

Great. On the Q1 call, it seemed that you were warning a little bit. So the Credit Karma growth was very good in Q1, expected to be good in Q2. But the back half of the year, the comps get a little bit more difficult, and we might not see that same type of strength. On the Q2 call, and my sense was you felt better about that durability of growth into the second half of the year. Can you talk to us a little bit about what you saw in terms of the opportunity that makes you feel better about that better half?

Specifically around Credit Karma?

Around Credit Karma, yes.

Yes. So I'll take you back to our long-term expectations that we've communicated around Credit Karma is that we can grow the platform 20% to 25%. And as you said earlier, we've guided the year to 35% to 37%. So it's experiencing hyper growth right now and well above our long-term expectations. One of the assumptions that we had at the beginning part of the year is originations, generally speaking, have been much higher than they were pre-COVID levels. And we just assumed that originations would taper back to pre-COVID levels, and we just simply have not seen that. Plus, we've actually seen more and more financial institutions start participating in our proprietary Lightbox platform, putting their credit models on Lightbox with their investments being even higher than what we had assumed because they're seeing great conversion and customer acquisition. So all of those things combined is what really led to the higher confidence that we had in the second quarter as we look at the Credit Karma performance in the second half. Now the comps are higher in the second half because that's when it started recovering last year, but our confidence in the business is very high.

Outstanding. I want to switch gears to small business. Broadly, Intuit has laid out a formula for durable 30%-plus growth in QBO, 10% to 20% growth in ARPU, 10% to 20% growth in subscribers. And we've definitely seen that type of growth recently, both in terms of if you look at QBO subscription revenues, it was 34% last quarter, 39% growth in the online services. There is some investor concern, though, that you're benefiting from a cyclical rebound out of COVID, which is a weaker period. You're benefiting from price increases that you've put forward. And that growth rate should -- is not going to be sustainable. How do you counter that? Do you find that, that subscription revenue growth should be sustainable for a longer period of time?

Yes. We do, Keith. And it's interesting, I've gotten a lot of questions around this today. I'll take us back to our overall TAM is $300 billion, but our small business TAM is $200 billion. And we have very low penetration. And our biggest opportunity in the small business is actually going after nonconsumption. We don't have to get people to convert from other platforms. Nonconsumption for us is if you're -- a lot of businesses use shoe boxes to manage their receipts, Excel, Google Sheets. So one is we have a very large TAM, which leads to the second point. We don't rely on new business formation. In fact, many customers that are new to our franchise are more established businesses. And in fact, I don't pay attention to new business formations. It's not a KPI we look at in the company because it's actually not a focus for us. It's more established businesses. So that's an important element relative to then, well, what's driving the growth. One is there's a general secular shift to digitization, which was really propelled by COVID. More and more small businesses are realizing that if I run my business on your platform, I can get paid faster. I can actually save money. I can be much more efficient in managing my money in and money out. So that's one element. The second element is consumer spending is strong, which matters a lot to small businesses. And the biggest challenge to small businesses that we serve, which are service-based businesses that are experiencing is shortages of workers because they're growing. And then third is just how our platform is positioned. We have the ability to serve upmarket. We've built out our ecosystem of services. And now combining Mailchimp and QuickBooks, we've truly become a one-stop shop for small businesses. And that's what gives us confidence in our long-term growth. Yes, we have tougher comps in the second half, but we also believe that we can continue to grow our online revenue by 30% plus.

Got it. Got it. On the online services side of the equation, it's attach rate formula, right? And it's been payroll and payments have been kind of the primary attach motion. Our sense from the external perspective is that attach rates for QuickBooks Online are below what you saw on the desktop side of the equation. Desktop was a larger customer. When I kind of do my math, and I think about sort of the push towards higher-end customers with QBO Advanced, does that give you guys the opportunity to sort of improve those attach rates over time? Can we see overall QBO attach rate start to approach what we saw on the desktop side of the equation?

Yes. There's really no structural reason why our attach rates can't get to desktop levels, an if not higher. So that's first and foremost. The reason we're not at those levels yet is QuickBooks Online is still generally a new platform. When you look at the attach rates in desktop, that's been around for 30 years. If you look at QuickBooks Online, it took us years just to build out the platform in the cloud. And we've accelerated our investments in things like payments and payroll and time tracking and access to capital just in the last 4 to 5 years. And I'll just use payments as an example. I think it was 4 or 5 years ago, our payments was growing like 11%. And now last year, it grew 40%. So all the investments that we're making in services and the fact that we've created truly an ecosystem effect where customers can get their needs met while they're on our platform is really what's accelerating the growth. And there's really no reason why we can't continue to accelerate that. And it's even a bigger opportunity, as you asked, when you go to mid-market. In fact, our ARPU for mid-market customers is 4x than non mid-market customers because they're using more of our services. So we just think there's so much room for higher penetration.

And now you have a major expansion of that sort of online services opportunity with Mailchimp, right? And so I think investors somewhat understand sort of the opportunity around Mailchimp to sort of extend into the front office, which is a new part of the equation. Can you talk to us a little bit about sort of the process of sort of taking the Mailchimp solution and sort of matching that up with the really highly tuned sort of marketing engine and go-to-market of Intuit, to sort of push that into the installed base? How does that occur?

Yes. Well, first of all, I'll give you one quick story as to why we chose to then move forward with Mailchimp. We started studying and really learning from our customers. And what we realized is they had created like 4 billion records in QuickBooks. And when we started following up with customers, what we realized is they're trying to use QuickBooks as a CRM tool. And when we ask, "Why are you doing this within QuickBooks? There's other CRM tools out there." The predominant answer was all my transactional data is in QuickBooks. I need my customer list and CRM capabilities right here because I can manage my business. And that's really what led to we really need to have this be part of the QuickBooks platform. And really the essence of the answer to your question is this is not about cross-sell, this is all about product. So our product strategy is to integrate all of the Mailchimp and QuickBooks capabilities so that if you're a small business and you're in QuickBooks and you want to find a way to grow your business, you can leverage all the capabilities of Mailchimp to be able to market to your existing customers, to be able to go after new prospects because all the Mailchimp capabilities are right built into QuickBooks and then vice versa. If you're in Mailchimp and you are marketing to your existing customers or trying to get new prospects, all of our payment capabilities, payroll capabilities are all integrated. So this is all about integration on the product side. And then by the way, we do believe we can fuel faster growth by just more marketing investments, which is something Mailchimp has not done in the past is they've actually been more focused on profitability versus growth, and we're changing the playbook.

Got it. And last thing I want to make sure that we touch on is the international opportunity. Can you talk to us about kind of where we are in the cycle of sort of expanding into new countries versus kind of leveraging some of the beachheads that you already created in some of the international expansion? And how we should think about sort of the emphasis of international growth versus kind of domestic growth over the next couple of years.

Sure. Well, first of all, the big bets that we've declared for the company are all global bets. They're not U.S. bets. With that as context, we're very focused on the countries that we are already in, which is Canada and Australia and U.K. with a couple of emerging markets like France. With that said, we have been pleasantly surprised with Mailchimp. 50% of Mailchimp's customers and revenue is actually outside the U.S. And other than just a very easy-to-use platform, they've really not invested in driving that international business. So we're actually stepping back and rethinking how do we accelerate and fuel growth outside of the U.S. with Mailchimp potentially as the lead beyond the countries that we're already in. And we're actually excited about the possibilities because of just the adoption that we've seen with Mailchimp outside the U.S.

Got it. Outstanding. Unfortunately, that brings us to the end of our allotted time slot. Any last thoughts you want to leave us with before we wrap up the session?

No, I just wanted to thank you for having me. And it's, again, wonderful to be here face-to-face.

Excellent. Thank you so much for having -- for coming.

All right. Thank you.