Intuit Inc. (INTU) Earnings Call Transcript & Summary

Excellent. Thank you, everyone, for joining us. My name is Keith Weiss. I run the U.S. software research effort here at Morgan Stanley. And very pleased to have with us CEO of Intuit, Sasan Goodarzi. Thank you for joining us.

Yes. Thanks for having me.

Before we get started, I do have to read a brief disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to Morgan Stanley sales representatives. Outstanding. So -- obviously, a lot to talk to, a lot of developments taking place over the past year. Can you walk us through maybe some of the like key developments in the overall business really around stuff like integrating the new acquisitions, stuff around taking that kind of human system interface that you guys have rolled out with TurboTax Live more broadly across the organization. This is a little bit of a different Intuit than we were talking about 3 or 4 years ago. And how are you going to see that kind of expressed into FY '24? Like we're in the current FY '23. How are you guys sort of pushing further on some of those dynamics on a go-forward basis?

Well, maybe I'll actually start very quickly with 4 years ago when we declared our strategy, which was about an AI-driven expert platform, and we declared the 5 Big Bets. The essence of what we declared was to shift the company from a tax and accounting platform to a platform company that powers your prosperity on a daily basis as a small business or a consumer. So that's 1 sort of huge shift. I would say the other shift is from moving to -- from a platform company where we're building capabilities for you as a small business or a consumer to do the work. So a platform company where we actually do the work for you. And we put decisions in front of you, so it's all automatically there to fuel your success. So that's the huge, I would say, from to. And that from to is showing up in terms of our investments in data, in AI and expertise. And so now I'll use small business as an example, we now in 1 place, have a platform where you can grow your business, manage your customers, manage your cash flow all in 1 place, which is why we've had the strength that we've had in small business. We just reported 20% growth at a scale of something that's over $7 billion. And it's really because we've now become the source of truth for your business. So that's really the from to, where 4 years ago, when you followed us, it was tax and accounting only. And now we're much more of an end-to-end platform.

I think, Tim is going to get mad at me, because I'm going to go a little bit off script. But what I'm so excited about in Intuit is like what you guys have been able to do at that sort of human system interface. We just got off the stage with Scott Guenther from Microsoft. And there's so much innovation taking place in AI and generative AI. And the systems are doing more, right? And the more work is able to be done in the system, but every single 1 of these needs in executive function. At some point, you need human getting into the equation at exactly the right point to really add value and make sure the systems are heading in the right direction. And I think back in like -- this is exactly what you did with TurboTax Live. Yes. Right. There is so much value in being able to have that proper like understand where this human needs to get into that system equation. And I think you guys have nailed it, right? And I think that makes Intuit not just a business model story, not just a tax story, but more of a -- like a secular story that you guys have a capability of interfacing humans and systems that's not seen in very many companies in software.

Can I just actually build on your point because this is, for us, one of the biggest opportunities as a company. So the biggest unsaid problem that our customers have, whether it's a consumer or a small business is confidence. They need -- we deal with people's money. Whether it's to be able to manage a business, grow a business, to be able to manage your life as a consumer, do your taxes, it's all about confidence. And one of the biggest things that we implemented about 4 years ago was this notion of our digital platform comes with expertise. Now that expertise by the way, is big time around data and AI. Because expertise doesn't just mean human. However, we have now added human expertise on our platform and that human expertise is all technology led. So if you're a small business, and you want help with should I buy more inventory? Should I hire more employees? Is it time for capital? One, our AI capabilities actually frame those decisions for you. But on a touch of a button, there's an expert there that will help you make those decisions. And by the way, the expert will also run your whole business for you. And we just actually shared at investor -- our last Investor Day, our variable margin of these live expertise platform capabilities is actually higher than just our digital platform, which is all because of the technology, right?

Yes. And I think that's -- right there is exactly the key point. When you guys first rolled out TurboTax Live, investors and myself, we were worried that, hey, listen, there's going to be people part of the equation, and we don't like people, we only like software because software has great gross margins, people don't. But the reality is that what you guys have proven out is if you could inject people and that executive function at just the right point, the margin on that is great. The margin on that could actually be better than software.

And in fact, since we declared the strategy and the 5 Bets with technology AI, data being at the core and expertise not only have we been growing the company at our scale double digits, but our margins have been expanding. And I always get asked the question, well, how is that possible? It's because it's technology-led, but it's done in such a way that you connect people to experts at the right time, and that expert could be AI, that expert could be a human, but it raises heads of nonconsumption because the majority of our $300 billion in TAM is nonconsumption. It's people that are using Excel, Google Sheets, a shoebox, having somebody else do their taxes, we're not taking share from other platform. We're actually getting people to convert. And then the world of everybody that was born after the smartphones they know only how to use technology and it's a tailwind for us.

You're right. I mean that's been the other really great part of the story is the consistent kind of expansion in operating margins. You guys are guiding for another 200 basis points of operating margin expansion in FY '23. I guess the question is longer term, how much more is left? Can you continue kind of expanding margins on a forward basis?

There is -- one, no structural reasons why we can't. And two, the reason we've been able to expand margins is just our shift in becoming a platform company. And for us, what that means is -- we're building services with APIs, self-service, all modular. And so our engineers can now leverage services what live platform, whether it's QuickBooks Live, TurboTax Live, Mailchimp Live, they're all using the same services. And so we're able to accelerate our innovation and we're able to do it actually at a lower cost because of our platform capability. So there's 1 no structural reasons why we can. And two, our intention is grow the top line and keep expanding margins.

Got it. All right. Lots is over, and now we're going to get into the hard stuff. I think the areas of pushback that we get on the story and 2 of the biggest ones are the recent acquisitions that you made, right? I'm going to start with Mailchimp. When you guys first acquired Mailchimp, it was supposed to be additive to the overall growth profile. Obviously, the macro kind of didn't cooperate with that plan. But it caused investors to doubt the fit. Like is Mailchimp the right asset? So the question is, do you guys still think Mailchimp is the right asset? Do you think that growth opportunity is still there on like a cycle-to-cycle basis absent the macro of this to be additive to the overall growth profile of Intuit?

Absolutely, without question, and let me just unpack the why. When you think about the small businesses that we serve, which is from 0 to 100, they are actually looking for 1 place to be able to grow their customers and to be able to manage their cash flow. The reason why we ended up doing Mailchimp is because -- it's for us, it's really a data and AI play. We now have all of the customer data and all the purchasing data in 1 place. And really, our focus right now is we're integrating the platform so that a customer can automatically be able to engage with new customers on social platforms, manage their customers, know which customers they have opportunities for additional services, additional penetration. Why? Because we have all the purchasing data. So for us, it's a game changer. And if you just look at the last quarter, we delivered 20% small business growth, 24% Online and Mailchimp is not yet accretive to that. And so we are very excited about the possibilities with Mailchimp. And it really creates 1 source of truth, 1 platform for the company that allows small businesses to fuel their success, and we're very excited about the potential.

Got it. So is this another case of -- it's not necessarily displacing kind of other competitors. This is more so just sort of getting attached, getting sort of participation from existing customers?

Yes. $200 billion of our $300 billion TAM is small business, and we have 5% penetration, and the majority of that is nonconsumption. So we're actually not getting you to switch from another platform. We're actually getting you to switch from sort of hodgepodging through multiple Excel spreadsheets to try to find which customers to pursue until it's all done digitally. And frankly, it's done automatically for you. What does that mean? We can help you with what your marketing campaign should be? When you do it? What the results are? What they purchased? Where you can penetrate with further services? So it's actually -- it's a shift from manual to digital. So it's -- we're writing the digitization opportunity, which is -- by the way, our growth has continued to sustain even in this macro environment because -- the more you use our platform, the more you can grow your business, the more you can manage your cash flow.

So it's proven out the ROI even in a more difficult...

Absolutely. And I would tell you, it's actually Mailchimp is not a macro issue. Mailchimp was run for profitability and cash flow. And we knew that. It's 1 of the many things that excited us about it. We're a growth company. And so we're putting in our playbook around product innovation and go-to-market to accelerate the growth. And we're starting to see the green shoots. It's not in our guidance, but the best is yet to come.

Got it. Got it. I want to switch gears to Credit Karma. Credit Karma like immediately after the acquisition had -- it was solid out of the gate, outperformed really well. Consistently beating sort of the initial you put out there. But as the sort of macro had turned over as kind of credit conditions have pulled in, obviously, the performance has come down and it was down mid-teens in the most recent quarter. And I think what worries investors most about this is not that Credit Karma is not a good business, right? But more so that it's a volatile business, right, both in terms of follows credit cycles, both in terms of -- it's more of a transactional business. And one of the things investors loved about Intuit was the durability of earnings growth, like the consistency of results is oftentimes people say, this is the closest thing we have to a consumer staple within software. Is it worth it trading off sort of the opportunity in Credit Karma for the increased sort of volatility is going to put into your results?

I would say, yes, and let me just unpack why. We -- if you look at our performance in the last 4 years, including the year that we're in. I mean, in this macro environment, our guidance is we're going to deliver 10% to 12% top line growth and we're expanding margins. There's a lot of companies that are not growing double digits. And so first and foremost, I think that's proof that we've accelerated the company's growth. The second is 85-plus percent of the company is subscription-based and highly predictable. And this is the only part of the company that is cyclical. Now the opportunity, though, is massive because we didn't buy Credit Karma just to be in that sector of the business. We're actually integrating Credit Karma with TurboTax. Because our goal is every TurboTax customer uses Credit Karma and every Credit Karma member, which is 129 million of them use TurboTax. So it creates a powerful network effect with the ecosystem that we have. And even if you look at the performance this year and you couple it with the last couple of years, we're still growing north of 25% over a 3-year period. So I actually feel, one, very good about the growth potential. But it's created a growth company for us, which I think is all given the benefit of the innovation that we've delivered for customers.

Got it. Can you talk to us a little bit more about where we are in sort of integrating Credit Karma and sort of -- what's on the road map, if you will? We've talked a lot about sort of the integration between Credit Karma and TurboTax and the ability to sort of get your refunds like directly into Credit Karma cash. What other kind of sort of natural adjacencies are there? What other sort of integration opportunities are ahead?

There are 4 priorities that we have. The first 1 you just touched on, but it's in the bucket of better together. We have a majority of Credit Karma members that don't use TurboTax, that's a huge opportunity. And we have a huge number of TurboTax customers and Mint customers that don't use Credit Karma. So we are investing a lot in embedding TurboTax as part of Credit Karma and Credit Karma as part of TurboTax. We're just getting started there. So I wanted to start there because that's a huge priority. The second is in the area of Karma Guarantee. And Karma Guarantee leverages the customers' data with their permission, applying AI to match them with products that are right for them at the lowest rate. And it can only happen on our platform because financial institutions have put their proprietary credit models on our platform. And anybody that is part of Karma Guarantee their approval rate is 2x better than anything off the platform. So that's the second. The third 1 is Credit Karma Money. So 1 of the things that will make Credit Karma over time not cyclical it's really been more focused on credit products. Now we're building out all of the money capabilities, things like being able to pay bills, being able to have a savings account, being able to build your credit, being able to put your -- get early access to your wages. We're building out all of those Credit Karma Money capabilities. And then last thing is prime. Prime customers are one of the largest monthly active users, and they're the least engaged because our typical focus in the past has been subprime and near prime. And now by putting Mint and Credit Karma together, we're building out prime capabilities. So those are priorities that gives us a lot of hope over time, we're going to get back to our 20% to 25% long-term expectation you said.

Got it. Could we dig into that last one, just a bit because I would say Mint is probably like the forgotten product of Intuit at least when it comes from the investor side of the equation, you're integrating that into Credit Karma more properly. How does -- or how or why does that let you gain better access and have better traction with those prime customers?

Well, prime customers have, by design, higher credit scores. And with higher credit scores, they look for very different things. They're looking for ways to manage their network. They're looking for -- when they look for a personal loan or a credit card or insurance they're actually looking for what perks come with it. And that has not been our focus in Credit Karma. It's a large cohort, but we've really tailored to sub-prime and near prime. So now actually we've moved the Mint team and the capabilities and now we're building those capabilities and transferring them to Credit Karma. So eventually, you may not have a Mint and all the capabilities will be on Credit Karma to really focus on those prime customers.

Got it. Got it. Got it. I want to switch gears a little bit and talk about the QuickBooks [indiscernible] I think one of the successes that we've seen over the past couple of years is the QBO Advanced or QuickBooks Online Advanced. And from my perspective, I feel like over the past, call it, 3 years, it's more of a shift in strategy, to focusing more upmarket. Why is that part of the market opportunity versus going more aggressively internationally or more aggressively to self-employed. Why is QBO Advanced that attractive and opportunity for Intuit on the go-forward basis?

Well, first of all, we define mid-market as 10 to 100 employees. We know these customers well because for years, we serve them on desktop. We just didn't have a cloud product. And most of these customers are also nonconsumption. Believe it or not, with their size, they could have millions of dollars of revenue, but they're still using shoebox, Excel, Google Sheets, it's a mess. And they're looking to get on a platform, but typically, all the platforms that are available to them are way overpriced for them. And so for us, it's a massive opportunity because we know how to serve them. And I think what we've proven in the last several years -- in fact, at our earnings, 1 of the things that I talked about was we're actually seeing great adoption with mid-market customers. We're seeing great service penetration with payments and payroll because we are a disruptive platform at a disruptive price and they get the ability to digitize their business and manage their cash flow. And by the way, Keith, we won't stop there. We're not going to stop at 100. We plan to go above 100, but this -- we want to first nail this cohort. So it's just a -- it's a huge opportunity for us to disrupt nonconsumption and frankly, in many ways, we're the only game in town.

Right. And you brought up an interesting point of that. Almost mechanically, there's a higher potential for attach of the online services. There's more employees. So there's a better sort of payroll opportunity. They have higher payment volumes is more of a pay opportunity in those larger customers.

Yes, it's 4x the ARPC than just a small business QBO customer. Because of the scale of customers they have, accounts payable they have, employees that they have is 4x. And then when you add to that, they actually look for more expert help through QuickBooks Live. It just simply increases the ARPC for us. It gives us a lot of leverage.

Right. Got it. And when you move into that when you move upmarket in that range, is there a different competitive set that you're starting to see up there? Or is it still like is that 100 user threshold is still too small to see something like a Microsoft Dynamics or some of those more kind of mid-market-oriented accounting suites?

Yes. It's actually why it presents a huge opportunity for us because when you look at small businesses that are between 10 to 100 employees, they have to stretch very far to pay $10,000, $15,000, $20,000, $30,000 per year for a platform. And so our biggest competitor is nonconsumption. They choose not to use anything, and that's why we've been able to accelerate growth so quickly because it's a very disruptive price point for them.

Got it. Sasan, I need you to help me with the modeling problem I've been having with Intuit. So every quarter, I come into the Intuit quarter, I'm expecting desktop to shrink. Every quarter, you guys outperform my expectation by a lot and still grow desktop. At some point, I guess, get over it and assume that desktop is it going to just continue growing on go-forward basis?

Frankly, we need to do a better job of conveying the story. So let me do it briefly now. We are in the middle of a significant business model shift with desktop. One, based on decisions that we've made, we've now moved it to subscription. So it's highly predictable now. Two, we are sort of midway through this business model shift where we are bringing the price points to parity. Before there was a big price point difference between, if you were on the desktop platform and the online platform, meaning online was more expensive. And so the price increases on desktop are shifted to subscription, same price point. And that is doing 2 things. One, we've been performing very well. I expect that to continue for the next several quarters as we finish the business model shift. But in addition to that, the acceleration beyond that is now we've built a lot of the capabilities online, where we'll be able to actually migrate these customers to online. And that's a big opportunity because of a tax services, payments, payroll, time tracking, Mailchimp. And so I would expect desktop to continue to be strong because we're in the middle of this business model shift. And then over time, we'll be able to migrate these customers more rapidly to online. So it's sort of an accelerator for us.

Got it. Got it. That's super helpful. Before we shift gears to tax, I do want to touch on like the B2B payment opportunity ahead for Intuit. And it's something that I think most investors think is a should be a good opportunity. I think you tempered expectations for investors a little bit at your Analyst Day, saying, listen, this is 1 of our sort of horizon initiative, something that is going to be more mainstream, if you will, over the next 2 to 3 years. But in recent results, it seems like it's doing pretty well. Like out of the gate. It seems like there's more of a here and now story, your TPV is growing nicely. I think it's like 25% growth in the most recent quarter. Where are we on that sort of...

So I would separate our stubbornness, conviction and the speed that we are moving from how we are tempering expectations. We talked about it having a material impact, 2 to 3 years down the road just temper expectations, but we are very bullish about B2B. Just to very quickly refresh ourselves. We're doing very well B2C, automating, estimating, invoicing and getting paid and digitizing all of that. But we have over $2 trillion of invoices that get managed on our platform. A big chunk of that is B2B. You're a QuickBooks customer, I'm a QuickBooks customer, and the majority of the way we interact is you write me a check, I write you a check. So now the B2B network digitizes all of that. So we just launched it in January. We've opened it up to about 1 million of our customers, and we're focusing on nailing the experience, but we believe it's a huge opportunity on 2 dimensions. One, we can monetize that on our rails, and it's a huge benefit to small businesses because they're getting paid instantly versus 75 days. The second is we have 10 million customers, which is massive. The majority of our customers also invoice other small businesses that are not on our network. So this is also going to be a new customer acquisition tool because, in essence, if I send you something and you're not on the network, you'll be presented 2 options. Keith, you can pay me in 75 days or I'll pay you in 75 days or you click here, you're part of the network and you'll get paid instantly. So we'll be able to draw some new customers. So we're at the beginning of creating that network, but our capabilities are built, we've launched it, and we're very bullish about the potential in the future. It is not yet in our 25% total online payments volume that we just reported. So that's why we're excited about the future.

Got it. Got it. Got it. So that's a separate opportunity. So -- maybe you could talk a little bit -- so it's only been launched in January. Like early feedback that I've heard has actually been pretty positive. People are super impressed with how easy it is to sort of get on to the network and that ease of use seems to definitely been there. What's the early feedback that you've been hearing, probably a lot more.

Well, 2 things. One, we've heard feedback around how easy it is because I can look up, if I want to send you an invoice, I can look up, Keith, you'll come up. I'll hit invoice and it will show up in your QuickBooks platform. The thing that we are working on is discovery on your end, easily finding that you actually have gotten something from so you can accept it. So that's what we're working through the experience. But the feedback so far has been this is very easy. Easy to find someone. All of your bank information is attached, so you don't have to fill out any information. All you have to do is click on the button and everything is now digitized.

Got it. Got it. I want to hit consumer tax before we run out of time here. I feel like over the past couple of years following these tax season has been increasingly difficult. There's been a lot of kind of shifting going on. But last year, we saw DIY actually slumped a little bit and lose some share versus assisted. This year, if you look at sort of the IRS data to date, it also seems like assisted doing a little bit better. It's actually a New York Times article or maybe Washington about sort of assisted and people going back to assisted. Should we be concerned? Is there something of what has been this long-term kind of shift towards DIY? Is that starting to slow down in any fundamental.

It's for us in the long term and short term, it's actually a tailwind. But let me just say 2 things. One, it will be very difficult to follow the data. Because if you step back in the last 10 years, you have a bunch of people that come in early end of January, beginning of February, those that really want the refund fast. And then what's happened every year in the last 10 years is there's a massive procrastination to the end because there's platforms like us where you can get your taxes done for you with you, last minute. What's happened this year is when we hit the pandemic, everything changed, right? People were in home, tax season got extended, all the behaviors changed, all the curves that you're comparing to are not useful. What's happening this year is there was a fast forming season. A bunch of people came in early to get their taxes done. And now a bunch of people are procrastinating. Typically assisted forms faster and then the do-it-yourself accelerates towards the end of the season. So I wouldn't read anything into the data. And for us, it's a tailwind because now we have a platform where you can do it yourself. You can do it with us with an expert or we'll take all of it off your hands, and we'll do it for you. So we're positioned well.

Got it. And that was going to be my second question. I mean, is it too early to sort of assume that you guys participate on that assisted side of the equation vis-a-vis kind of the full assist product?

It's not. The way our customers think about the platform and the way we've built out our platform is the full service capabilities is a halo effect. The biggest reason why people go to somebody else to get their taxes done is confidence. I don't want to not get my largest refund. I don't -- I want to reduce my balance to. I don't want to get audited by the IRS, so it's a confidence issue. Well, now we connect you to the best experts that are great at investments, great at -- if you're a plumber and they need to know your business, we have experts that we match you to given all of our AI capabilities. And so it plays a halo effect to bring customers in. And so we are able to play off of that because now we have the full service capability so well. And it's all driven. So it's high leverage.

Got it. If we think about TurboTax Live, the solution took off and got a really significant penetration within sort of your TurboTax overall base. Growth slowed down, but still robust in next year. Is TurboTax Live something that should continue to get further and further penetration to the base? Or is it more of a -- like there's a certain amount of customers that are going to need to kind of hit that button and say, "Hey, listen, I got stuck. And that percentage isn't going to really change too much year-by-year. So this is an important functionality. It's an important uplift, but like penetration is going to be kind of capped at some certain level of how many people hit that point.

It's a great question. So it's a $35 billion TAM, $5 billion is do-it-yourself. $20 billion is consumer tax and about $10 billion is business tax. This year, we also opened up business tax. We now will do your business taxes for you, and we're going to eventually do it through QuickBooks as well. So we're going to serve that market through both platforms. Out of the 88 million folks that go to somebody else to get their taxes done, we've done a ton of work and research data driven in this area. More than 70 million are willing to do their taxes on a digital platform as long as there's expertise. So we believe like last year, TurboTax Live was $1 billion, at 30%. I mean our future in TurboTax is all TurboTax Live. And we're just at the beginning of that curve. The penetration is very small compared to what's possible. And out of the 88 million, more than 70 million are willing to use a platform with expertise, and that's what we have. So the upside and the runway is probably 10 years still ahead of us.

Right. So beyond just sort of the value proposition of keeping people from sort of abandoning...

No, no. This is a growth opportunity, this is a penetration opportunity.

Opportunity to get to that broader basis.

Absolutely.

Outstanding. Unfortunately, we ran a little bit over time here. But Sasan, thank you so much for joining us as always a fascinating conversation.

Awesome. Thank you for having me.