Intuit Inc. (INTU) Earnings Call Transcript & Summary

Thanks so much for joining. We are keeping -- we can keep the virtual bus rolling. We are super thrilled to have Intuit join us today. We have Alex Chriss and Kim Watkins from Intuit. So Alex and Kim, thank you so much.

Great to be here. Good to see you, Alex.

Alex, maybe just first, just give a -- just remind people, brief intro, like what's your role at Intuit, how long you've been there. And then we can launch into our scheduled programming.

Fantastic. So Alex Chriss, been with the company going on 18 years now. I am the Executive Vice President and General Manager of our Small Business and Self-Employed Group. So that's the full QuickBooks franchise, now MailChimp, and essentially everything we do for small businesses and self-employed.

Awesome. And as always, for the audience, I'm going to ask -- you'll hear the same set of questions in the beginning. And then as we dive into the more specific ones to the companies, but please feel free to put some questions in the Q&A box as long as they're appropriate. I will ask them towards the end of the fireside. With that, Alex, as promised, first question, how is the current demand environment?

For small business, we're still seeing good tailwinds coming out of a couple of things that I would like to highlight. One is just the shifts that we've seen through COVID of small businesses really moving online, right? We have seen a huge shift to virtual, a shift to online services, and that just continues. As small businesses think about what do they need to be successful, there's lots of moving parts in the world today, and anything they can do to bring a platform together that makes them efficient still seems to be where they're heading. The second piece is just the big sort of strategic shifts that we've made over the last couple of years. We -- if you go back 4, 5, 6 years ago, really with the QuickBooks franchise, we were focused on financial management software and really being what I've termed sort of the source of truth for your books. And we've shifted that. And we are now really thinking end-to-end and being that source of truth for the full business. And so it gives us lots of different things to have conversations with customers about. So it's not just financial management software. It's about time tracking or capital or, obviously, payroll payments, and now with MailChimp, the opportunity to have a conversation about getting customers and CRM and marketing automation. So lots of different ways to have conversations with customers and continued tailwinds from just a general move online.

Perfect. So now let's kind of bridge that with how would you characterize the demand. What was the impact from COVID on your part of the business at Intuit? How did it affect spending, sales cycles? And as we're coming out of it, what is the -- either the headwinds or the tailwinds or the moving parts for investors to think about on this part of the business?

Again, I would highlight what we have seen has been a big shift for small businesses to online, right? Small businesses, if you think about all the different components, whether it's consumer or enterprise or small business, small businesses are very often laggards when it comes to just technology adoption. And what COVID did was really, in many ways, force their hand, right? If you're a small business that suddenly no one's allowed to come into your store, or you're a service-based business where you can't get that check in person anymore, you've got to start to think about how to take digital payments. You've got to start to think about how you're going to manage your business in a virtual environment. And so those tailwinds have been a mindset shift that we're not going to go back to the old way, right? We're not going to go back to sort of pre-COVID environment. And so it's been really a strong shift in how small businesses have been thinking about the environment. And we're continuing to see those tailwinds. Obviously, as we move to the back half of our fiscal year here, we're coming over the comps of this time last year where really the whole world was opening up. So those will continue to be more difficult comps, but we're also continuing to see the tailwinds in general of just small businesses moving online.

Perfect. I'm not going to ask you the question about Europe because your exposure there is almost N/A, I think, is the term we use in our comp sheets. But what I want to do -- what I do want to ask you, given your exposure to small businesses, how do we think about the puts and takes of your business in a more recessionary and/or inflationary and maybe even both environment? And are there -- you've been at the company for quite a bit of time. Are there periods in history you would refer us to, to think about like how the business has acted during those times?

We've watched the business over multiple recessions as well as good times. Small businesses are resilient. Small businesses are consistent. And we even continue -- if you think about '08, '09, we continue to grow the small business franchise during that time as well. When we look at our -- do small businesses have their customers that have jobs and do they have money? And if they have jobs and money to be able to spend, then our small businesses usually find a way to pivot and persevere and work through it. So we continue to see small businesses thrive through a variety of different periods. I'm sure if you think about some of the new businesses we have access to like Capital, you'll start to see different demand curves from a Capital perspective. But overall, the general small business economy works well in all types of periods, and we've seen that over time.

Perfect. And then the fourth question is, basically, what do you feel right now is the most misunderstood aspect of the Intuit story, at least from the angle -- from the business segment that you cover during your dialogue with investors?

I think -- and this is -- it's only misunderstood because it's relatively new and we're still going through it. But I do think this thought of expanding who we are, right? And this is even -- frankly, it's even misunderstood with some of our customers. This expansion to being the source of truth for their business and now having a conversation about a number of different things that I would say in the past, you could even look at us and say, we were kind of on the sidelines. So I'll take payments and money movement as an example. Couple trillion dollars of money gets recorded inside of QuickBooks every year from our customers. They have to from a compliance standpoint. For decades, we've been on the sidelines helping them record that money but not helping them move that money. We have now shifted that dramatically. Our entry into not only payments, but also providing a QuickBooks checking account, providing capital when they need it the most, giving them cash flow forecasting, obviously, building on our payroll, but also now with partners moving into bill pay. So just allowing them to move money in and out, see their cash flow and then get access to capital when they need it, we are very quickly becoming that trusted partner to be able to move that money in and out. So I think that's just scratching the surface of what's changed. In addition, we've expanded our TAM significantly, right? Over the last few years, we've gone downmarket into self-employed. We've gone upmarket into QuickBooks Online Advanced into the mid-market. That is a huge expansion of where we've played in the past, which has traditionally been that sort of 1- to 10-employee range. We're now from self-employed all the way up to 100, 100-plus employees. And then the expansion of, obviously, the services. So not only the payroll payments, time tracking, capital, but now with Mailchimp. So anyway, just a big expansion of the addressable market and sort of who we see ourselves as, and all of that's customer backed. It's all our customers coming to us saying, "I want one platform where I can be the most efficient and get the right partner." So it's customer-backed but a big expansion of who we've been.

Awesome. At this point, I'll also prod our investor listeners to post questions in the forum. I would say, Alex, given all the moving pieces in the business -- exciting moving pieces in the business, when -- I know this is the hardest question for someone to answer. It's like picking between your favorite children. But as you stack rank the growth drivers that you're looking at inside of the entire kind of SMB side of Intuit, when you think about what's either most -- I don't know the right way to ask it, either what's most exciting for you or what you think is going to be the -- having the most needle-moving characteristics over the course of the next 1 to 2 years or maybe longer, how would you kind of stack rank those drivers?

It's a hard question. I'll tell you what gets me most excited, which is when our growth drivers for the business align with the customer benefits that we're able to deliver for customers. So for really years, and we've talked about these for years, and they've been consistent with customers, we've had customer benefits around saving time, about putting more money in our customers' pocket and about giving them complete confidence, right? Those are just sort of the truths of what small businesses need. We now have innovations and new market opportunities that align perfectly with those. And so when those 2 things come together, I think there's a big opportunity. To give you an example, confidence. Every small business, they're out starting on their own, trying to figure this out. For many of them, it's the first time they've ever gone out, and they're making this up as they go along. And that crisis of confidence hits them. Our entry now into things like QuickBooks Live, the ability to give them the opportunity to have a partner, a trusted bookkeeper coming from QuickBooks, to be able to help make sure that they get their books done right and grow their business, that aligns not only a huge growth opportunity for us to move into the assisted space, but also for small businesses to get that confidence. I talked about money movement before. Obviously, saving them time across any of the efficiencies or automation that we put together and having a single platform gives them an opportunity as well. So those are what gets me excited when we can align the customer benefits of what they really need with massive growth opportunities for us.

What are you seeing kind of from signals -- early signals in QuickBooks Live attach rates, what that does either to the pricing algorithm or the unit economics of the business as you attach more of those engaging services into the product? And over time, have you talked or thought of -- I mean, I'm sure you thought about it, but have you talked at least initially around what percentage would you expect to ultimately have some sort of live services of your customer base for QuickBooks associated with them?

We're still early in line, but just to unpack a couple of parts of your question, first, this is exciting for us to move from just sort of the DIY software space into the assisted space. Now even when we were selling DIY, we knew that small businesses are more successful when they have an accountant or have a bookkeeper helping them. And a lot of that's because it helps them with confidence. It helps them set up success, but it's also a tremendous recommender of what are all the other services that, that specific business needs to be successful. So as we now move into that assisted space, I think, to part of your question, it allows us to have a more broad conversation with our customers, right? We can not only help them with the bookkeeping challenges that they have and the confidence that they need, but we can also get to know them as a customer. And now that we have a broad platform of services, some are owned, some third-party services, we can really match them with the right portfolio of offerings that we have for them to be as successful as possible. That's just a different conversation and a broader conversation that we can have going forward. Again, early days in what all the attach looks like in that conversation. And obviously, our live service, because it is an actual engaged service, is priced very differently ongoing. So we'll continue to learn that. We're focused on providing a great service with high PRS and high retention. But again, it's a good service for us to get into and really helps our customers from that confidence standpoint.

Perfect. Let's go to a few more metrics or financial-oriented questions. I'll weave in strategic elements in there as well. But if I look at the SMB Online Ecosystem business, it's accelerated almost 4 straight quarters now with some very recent strength in Q2. And when I listen to Sasan, he's very consistently told us about the -- and you're talking about it too, the secular tailwinds being here to stay. Can you expand on the confidence? Because a lot of investors do feel like there was at least some kind of pull-forward of activity into last year? You touched on tougher comps. What's the right way to kind of think about both the seasonal parts of the business on the payment side, the -- as well as kind of the confidence in maintaining the kind of growth strength that you've seen in that Online Ecosystem business?

Sure. So just as a reminder, we have said our focus is to grow Online Ecosystem revenue north of 30% every year. And then we were going to do that -- goes back to what I've spoken about earlier, which is an expansion of not only customer growth, of what we're targeting of 10% to 20% every year, but also ARPC growth. Now with all the suite of services we have, we think we can continue to grow ARPC 10% to 20% every year. So you put those 2 things together and we're, again, have a lot of confidence in our ability to continue to grow Online Ecosystem revenue north of 30%. In terms of the question around pull-forward and so forth, what I'd say is small businesses are not enterprises. They act very differently. Their decision-making when it comes to buying software, moving on to services is not in a long-term decision of expense management. This is about, hey, what do I need right now in order to make my small business successful, right? Have I reached a point of maturity where I can no longer run my business on a spreadsheet? And at that point, when you look to what's in the market, we think we have an amazing suite of offerings that are priced incredibly well for small businesses to be able to make their business successful. So that's how we think about it. I don't -- we haven't seen any signs of any pull-forward. It just isn't the way that small businesses think about buying, which is different from enterprises. But they're in the moment, and small businesses are trying to figure out how to be as successful as possible. And again, all those tailwinds I talked about earlier in terms of just now orienting themselves towards online, online payments, online software, we think are here to stay.

Got it. Another part of the business that we talk about or we see in the P&L that I think a lot of people just want to better understand is the desktop side of the house, particularly -- that's a very loyal customer base. It's been extraordinarily resilient. It still has grown for you as a business. What are the trends that you're -- you've seen there, that you're seeing there? You've obviously made some changes on price to create a bigger incentive, if you will, for transitioning customers to your online subscription offering. Let's talk about it in kind of a holistic, strategic way. Specifically, is it a risk because you could start to see a decline that's meaningful as more people migrate? Is it something that's very stable and consistent? What -- how do we think about it?

Yes. So as a reminder, the vast majority of our new customer growth now is online. So those tailwinds, really, it's all about online growth. That said, as a franchise that's 27, 28 years old and started with desktop, we have an incredible product and an incredibly loyal customer base with a very, very sticky product, right? Once you've learned the UI of the desktop, I mean you watch some of these small businesses use the product, and their magicians using the product. They can move so quickly, and all their data is there. So we're very proud that we have an incredible product, and we continue to invest in it. That said, demand, to the tailwinds we talked about before, especially coming out of COVID, we're seeing more and more customer demand towards not only online product, but also just the concept of subscription software, right? 20 years ago, that -- you had a lot of headwinds towards buying something that wasn't just installed on your desktop. Now you have almost the opposite which is, well, wait a second. I want something that I can get the continuous updates for. I want something that is a subscription. And that's -- even for folks that want the desktop experience, we have really moved towards offering desktop as a subscription. And we're seeing great uptake in that. Now that comes with revenue recognition differences versus just purchasing Desktop. And also, just as a reminder, the way our desktop software is purchased in the past, it really was a 3-year cycle, right? You bought the product for 3 years. It came with a 3-year license. And then we would see some people buying it every year, but most people buying it every 3 years to continue their payroll or payments or just continue to get the update. So look, there's a lot of shifts there. I would say we've been wrong in how we thought about how fast it would decline really every year for a number of years now. The product is just incredibly sticky and customers continue to love it. So we're continuing to invest in the product. We're continuing to see demand move to folks online. And we're continuing to see people move to subscription. So so far, we've seen stability. A lot of the purchase happens in the spring as their 3-year time horizon comes off. So we'll see what happens. But at the end of the day, we have a lot of confidence they're going to stay within our franchise. And they're going to be using the products and suite that they've -- services that they've grown to know and love. So they may be shifting between products, but we're confident they're going to be Intuit customers.

I'm going to ask 1 or 2 more, and then I will ask -- I will end it with the questions from -- 2 questions from investors. Maybe just quickly on retention rates. Retention rates in kind of your target customer segment improved pretty meaningfully last year. Just maybe unpack what drove that improvement in retention. And also, how much more room is there to go as you look over the course of the next 12 months?

Yes. There were a couple of elements there. One was we pulled out a bundle that we had between our QuickBooks Self-Employed products and our TurboTax product, which was a bundle that we actually just stopped offering. And so that actually had very low retention rates. And so by pulling that out, retention improved. We also think there's durable retention improvements just in improving the product. It goes back to what I talked about earlier. The more we provide an overall platform for customers, the more we're providing a whole suite of services now. And so they really can get almost everything they need, certainly in the back office, from QuickBooks, and now, with Mailchimp as well the ability to help them grow customers. So we think there's still opportunities for us to invest in the product to continue to improve retention. The other, just with the incredibly high retention rates we already have, the biggest detractor is just businesses going out of business, which is small businesses face incredible challenges. 50% are going to go out of business within that first 5 years. Our ability to just continue to give them the insights they need, whether it's cash flow forecasting or access to capital, to stay in business is also good for retention as well. So investing in the product, investing in services, retention is always something we're going to focus on.

Got it. And then Mailchimp, right? I mean I know it's still early. I think Kim talked about the level of investment that you guys have made on the marketing side, on the front-end side of that business, restarting that for Mailchimp has been pretty meaningful. I know it's early, but what are the -- what are you seeing that's either generating a tremendous amount of customer enthusiasm? What's working? And what is driving kind of -- like if you can stack rank your growth drivers, but now just from a Mailchimp perspective, what is making you most excited about the early traction you're seeing?

Yes. Well, first, just -- you hit on it, but just to remind folks of the context, the #1 challenge that small businesses face is getting customers. And so our ability to give them an opportunity to leverage the data, leverage the information that they already have inside of QuickBooks, which we know the vast majority of small businesses don't use stand-alone CRM software, but they're using QuickBooks as their source of truth for their customers. So we have a lot of that data there. The ability to now take that data and leverage it with the best-in-class offering of Mailchimp to be able to reach out to their customers, target new customers, communicate with the best customers in an ongoing manner and just continue to foster and grow new customer growth is just such an exciting end-to-end growth platform for us to be able to build. So the vision is clear for us. The strategy is clear for us. It's still very, very early since we brought the team in. Mailchimp in the past have been really focused on profitability, which has been great. But now as we start to shift towards just growth, we're seeing a lot of opportunity to lean into marketing, as you mentioned; lean into continuing to build that end-to-end platform; look internationally, which Mailchimp has a great international presence and adoption with a very self-serve, global, easy-to-translate product. And so lots of growth opportunities for us as we now orient the team. And it's just been a lot of fun to even talk to many QuickBooks customers who have been thinking about CRM, but now that they have Mailchimp at their fingertips, they're now starting to test it out and give it a shot. So still early days, but I'm very excited to see this strategy play out.

Got it. I'm going to -- I promised to ask a few investor questions. And I'll remind investors, if you ask them at the end, it's harder for me to dial them into the meeting. So please ask them earlier. We just got a few right as I was saying that. The first question is, what are the different channels of distribution for QuickBooks besides online or retail self-enroll? And how important is the reseller/partner channel?

The -- you hit on the main drivers and the main channels. The other one that I would highlight, which is a real competitive advantage for us is our accountant channel, right? We have over 0.5 million accountants who know and use our product. We provide them with accounting practice management software for them to be able to run their own firm. And then they get to know and use and love the QuickBooks product, and that's what they recommend to their clients. So if a client walks in and says, "Hey, I need help." More times than not, they're going to put them on a QuickBooks subscription. And we foster that relationship and build that relationship very tightly. So that's a huge channel for us. In terms of partners, we're just now starting to build that out. I'd say we're starting to see good traction. And mostly, it's into the mid-market. So we know as we're starting to think about mid-market -- competing well in the mid-market, we want to make sure that we're finding those systems integrators, those VARs, and really running a mid-market playbook to ensure that a business that has been nonconsumption, not using anything, but now wants a whole suite of offerings, is going to go out and bring some -- bring a partner in to build that software set. And we want to make sure that they've got QuickBooks Online Advanced and payroll and payments and time tracking and all of the mid-market offerings that we have, including Mailchimp, at their fingertips to be able to get them up and running. So I think you'll see more and more investment from us on the partner channel as we move into the mid-market.

Got it. Next question, can you give us an update on the Bill.com partnership? Would you ever think about developing your own accounts payable solution?

Bill.com is a good partner. We actually have a number of bill pay partners right now to ensure as an open platform that we're able to meet the needs of our small businesses. Some have advanced needs where they need a lot of workflow. Some just have super simple needs, where they're just trying to get that one bill paid. And certainly, as we think about the end-to-end exposure of ensuring that small businesses have money-in opportunities, whether it be through an invoice or any way to get paid, and money out through payroll or bill pay, we're going to work really hard to solve that end-to-end through partners or even potentially through our own offerings. So...

I'm playing speed question with the investor questions. Within the 30% growth algo for online, the portion that is tied to customer growth, what are the puts and takes as it pertains to new business formations and potential slowdowns there? It's like a sneaky recession question.

Well, that's good. We -- this is actually a good question. We don't see new business formation as a big short-term driver of our business. Frankly, by the time people are ready to get financial management software, or at least QuickBooks, which is where this question was focused, their business has matured a little bit. It's maybe 9 months, maybe 18 months into formation, and they're the ones that have sort of survived. So there's a lot of people that go out and decide they want to start a small business, that new business formation can start and stop even within weeks or months. Those are not really QuickBooks customers that we've seen in the past. So we're always looking to go after new starts, but the reality is the new starts that we're thinking about are the ones that have found some level of their version of product market fit, their version of finding a market out there. And now they're ready to think about the taxes they need to pay, the compliance that they need to get to. So we don't see new business starts as something that we track in terms of providing any headwinds to our business. We're more focused on the tailwinds of small businesses in general, moving out of either nonconsumption or a desktop environment into online or a virtual environment due to the COVID tailwinds.

Alex, you're crushing it right now. So I want to keep going because we have another minute. The next question is, how do you think about the growth of Mailchimp in light of the 30% QBO growth guide? Do you believe that business can grow at that rate and why? Second, how should we think about the path for it to accelerate to that point if so?

I love these questions. You're seeing the strategy come together, and you're getting on the same excitement that we are with the opportunity with Mailchimp. Look, again, very early days. We've given some outlook as to where we are with Mailchimp. And again, very early. We're on plan to where we expect to be with Mailchimp. What we're going to see over the next 6, 12, 18 months is building that end-to-end growth platform that I talked about earlier. That's when I think things are going to really unlock. I think as a stand-alone business, Mailchimp has a lot of opportunity ahead of it. But together, we are now the only small business platform in the world that can provide the ability to grow your customers and run your business, and that's what's going to unlock growth for us.

Perfect. I'll leave it there. I want to give you an ability to have a great one-on-one schedule. So hopefully, we've fired you up, and thank you so much for joining. Like I said, everybody, you'll have a survey in your inboxes to fill out. Should take 30 seconds. It's important for management. It's important for us. But with that, Alex, thank you so much. And Kim, thank you again for making Alex available.

Thanks, Alex. Take care.

Thanks, guys.