Intuit Inc. (INTU) Earnings Call Transcript & Summary

Great. Welcome, everybody. Delighted to be welcoming Intuit to the conference here. This year, we're very fortunate to have Ken Lin here, CEO and Founder of Credit Karma. I've got some questions that we'll kind of go through, and we'll save some time at the end. If you have any questions, we'll give you the opportunity to ask questions. So feel free to raise your hand, and we'll get to you. Ken, thanks so much for joining us. My pleasure. Great to have you here.

Yes. Thanks.

So why don't we just start. You're the founder of Credit Karma, now part of Intuit. Maybe just a little bit of your background and kind of the impetus for the company? What was the idea for -- behind the founding of the company? And what are you excited about here as part of Intuit?

Yes. So great to be here. Thanks for having us. So -- by way of background, I started my career in financial services. I worked at a credit card company early on. I found my way to an Internet company and said, "This is amazing," and started Credit Karma 17 years ago. So with that as backdrop, when -- 17 years ago, when consumers were looking for credit scores, which is really one of the defining metrics of their financial life, you couldn't get it for free. And we thought that was a real opportunity. And what -- I think our secret was or sort of the linchpin of it is when people were looking for their credit, they weren't actually looking for credit, they were looking for money, right? They were looking for financial services products or what their credit could afford them, and that's really the impetus by which we've grown to over 120 million members on our platform. And partnering with some of the largest financial services companies is that when a consumer is looking for credit, they're looking for which financial services products they're qualified for. And over time, we've really grown our platform and our business from just giving away credit scores to really understanding the nuance what they are looking for, and then building our platform to drive certainty in helping them find the right financial product, whether that's a credit card, a mortgage, a personal loan and so on. And that's really what the platform has become.

Awesome. That's great. And AI is obviously a key topic here for software in general. When I think of Credit Karma, I think of AI and Lightbox. So would love to get your perspective on the underpinnings of AI in the Credit Karma platform, the Lightbox engine and where do you see the direction of Credit Karma with regard to AI?

Yes. So it's been interesting. Over the last year, everyone is talking about AI and generative AI, in particular. And what's really interesting in that is this is something that Intuit has been focusing on for the last 5-plus years, right? We've always said that we were an AI-driven financial platform. And all of those key components have been landing, I think, within the last year. And to give you a little perspective of I think this is transformative. But also how we're thinking about is -- and what's interesting is the technology, right? Obviously, the LLMs and the ability to process language is interesting. But what's missing from the equation, which I think Intuit brings is 2 important aspects. First, is the data side of it. And next is the capability. And to give you very specific examples, if you go into a GenAI platform today and you say, "What's the best way to build my credit score?" It can give you a 1,000-word essay on what the best practices of building your credit score should be, but it won't give you any specific advice because it doesn't know you. It doesn't have any data that is pertinent to you. And I think that's one aspect that is really important. When we think about -- when it comes to financial services, the context really do matter, right? Generic advice never works. It has not worked over the course of the last 30 years. I think that's really why Credit Karma has been successful in that context. So that's one key aspect. The other is capabilities, right? Consumers are going to want their financial agent to do things on their behalf, right? They're going to want you to move money around. They're going to want to apply for that product through the platform itself. And it's those capabilities that will make GenAI and financial services transformative. Right now, we can do a bunch of searches. We can ask for essays to be written. We can have papers written. We can do searches in a really unique and differentiated way. But to have contacts in financial services, I think those are the key elements. And if you think about what we have been acquiring over the course of the last 17 years or building, right, it's all of the composite of the financial information on the consumer. So it's the TransUnion credit report, the Equifax credit report, Clarity data, LexisNexis data, your driving behavior, what type of property you live in, right? Those are all things that we have on the credit card platform. And then the Intuit platform, as a whole, has been building things like IEX, which is the ability to connect the financial institutions and get transaction-level -- transaction level data, its ability to move money around to a set of APIs that Intuit has. So you put all those things together and now you have a true financial agent in your pocket that not can just answer questions, but actually make your life simpler in the form of taking care of tasks that you do on a daily basis, but in a way that you don't think about and creates real disruption.

That's great. So you touched on some of this already, but maybe if you can just give us an idea of the underlying -- the underpinnings of Lightbox? Like what is the data set that you're consuming? How are you consuming this data? How are you feeding that into the recommendation engine?

Yes. So Lightboxes are proprietary underwriting system. So 17 years ago, when we started Credit Karma, everyone is coming to Credit Karma for their credit scores. And going back to this idea, what they're really looking for is what does my credit score afford me? As big datas come into play, as underwriting algorithms have gotten more complicated, 5 years ago, we decided to build Lightbox, which is our way of mimicking, mirroring what the financial services companies are doing in the form of underwriting decisioning. So with it, all the data goes into the platform. And then our partners can put their secret sauce, right, their underwriting models into our Lightbox platform. And what happens there is we can then qualify consumers sort of instantly as a consumer logs on to what product that they're qualified for. So to give you a little bit of context, in subprime lending, roughly 70% of loan applications are declined because the consumer who is looking for a loan simply isn't qualified for that product. When we use Lightbox for that same consumer, those approval rates get north of 95%. Because, instantly, we already have all the data, but now we know the criteria by which the banks are making their termination of eligibility. And we've gotten so confident in the technology and the process itself. We have a product called Karma Guaranty, which is if you're not approved for the product, we'll actually pay you money, right? So that's the evolution of the product. But going back to your question about GenAI, I mean, this is the key components of how we think it will be transformative in this space. Because it's one thing to say, hey, what is a good bank for a prime consumer? It's another question to say, what is the best financial services product for me to get money at the lowest cost? Well, those are nuanced questions that only through data and these integrations that we're able to create. So it's an example of how AI will come into play. But more importantly, this will transform the industry in terms of the way that you find products, shop for products today will be very different than how you think about them tomorrow.

That's great. That's great perspective. Maybe we could just talk a little bit about the business model. It's very different from your typical software subscription business. So if you could elaborate on how you monetize and pricing?

Yes. So our business model is effectively free for all of our members, right? So we started this 17 years ago with the idea that while there's a lot of great data, a lot of great technology, they're tended to be used by all the financial services companies, and consumers never had an ability to benefit from it. So with that said, we thought that the free model is the right way to do it. And we make all of our revenues from our financial services products. So our model is very simple. When you come on to Credit Karma, you're able to get your credit score, your credit reports, all for free. It takes about 2 minutes, 20 questions, you can register. And with that, we can instant see all of your debt. We can see when you last applied for a credit product, what the interest rates of those credit products are. So we see something like $7 trillion worth of consumer debt on our platform, and we know what the interest rates of those products are. Now to get specifically into your question about the business model, what's interesting is when you're able to see an auto loan at -- being charged at 19%, we can quickly determine that with Lightbox that another lender would give that same consumer and auto loan at 12%. We can do the math, right? Computers are really good at that and say, "Well, Brad, you would save $100 a month. Same term, we're not extending the term. You literally just saved $100 because you're moving from 19% to 12%. " And in that model, when you do that, the bank would pay us a success fee in the form of a few hundred dollars usually. You, as a consumer, would save $100 a month for the next 39 months that you might have that loan. And the bank gets a new customer, right? So when you think of that, it is a win-win-win. The loser in the equation is really that bank that was charging the consumer 19%. And oftentimes, we all know that. Auto loans, in particular, are a category that doesn't have a lot of shopping, doesn't have [indiscernible]. So really, that's the transparency, that's the simplicity that we bring into the space. Over the course of the last 19 years -- or 16, 17 years, I guess, feels like 19 years, we've been moving from what we started off as a core vertical in the form of credit cards and personal loans, to things like mortgages to insurance, to banking services, like Credit Karma Money and Credit Karma Checking. So we've expanded over the last 15 years and so. But really, the core of what we do is providing data insights to our members and helping them find the right financial services products, offer free in an innovative way where our banking partners are paying with their traditional marketing dollars.

Wonderful. And the business is cyclical. It's proven to have some sensitivities in the macro. So maybe you can just touch on the impact from the macro slowdown on the business. How has that manifested in the business? And coming out of this, how do you expect the business to behave?

Yes. It's been a really interesting business cycle, right? So financial services, in general -- the economy, in general, are quite cyclical. But if you look over the last 30 years, there's a couple of interesting trends. One is that there is a very consistent aspect of borrowing. If you look at credit reports over the course of the last 3 years, on average, a consumer will take out 1.1 to 1.2 financial services transactions each and every year, like clockwork, right? That average has not moved at all in the last 30 years, and those would be credit cards, personal loans, refinance, auto loans, you name it, student loans. So that is a very predictable aspect of the business. What has been unpredictable are these sort of momentary changes in the economy and it's the volatility that's created the biggest angst. And what we saw over the course of the last year is a couple of things, right? If you look at personal loans, for us, it's our second largest driver of revenue. Well, most of our personal loans partners, they securitize their loans in the ABS markets. And when you are lending out loans or making loans and then selling the security, well, you don't know what interest rates are going to be in a quarter. You have a hard time pricing on those loans. And as a result, you tend not to want to lend a lot of those loans because you have quite a bit of risk. Or if you price them too high, right, you get adverse selection and you have risk in a different factor, right? In that case, you have defaults versus inability to generate revenue from selling the loans. So that's what we've seen in the personal loan side of the world. In the auto insurance space, which tends to be more acyclical. But what's happened here is that inflation has gotten the better of that industry, right? Historically, through most recessions we all need insurance, we all buy insurance policies, and they tend to move through these cycles without being affected. But because of inflation, because of the cost of repairs, the cost of parts, the cost of labor, a lot of insurers were underwater in terms of their policy, right? They couldn't get their pricing ahead of what it costs to fix those loans, or not loans, to sort of recoup the policies. And as a result, you can see a lot of the loss ratios in that sector go north of 100%. But all of those things will be back. And then lastly, sort of in the mortgage space, what you see is that obviously, refinance doesn't make sense in a world where interest rates are moving up, unless you need cash or unless you want to extend your term. But the good news there is as things get stable, even at higher interest rates, people are going to need to refinance their 5% mortgage at 5% in the future, right? So all of those things tend to come back and you go through these cycles. But what we've seen is that over the course of the last year, we were hit with all of those at the same time. But again, going back to the note that the borrowing rates of consumers are very steady, and all of these things will work through the system, and refinance will be back. People will need to buy [indiscernible]. Credit cards and personal loans will continue to thrive.

Makes a lot of sense. And the Credit Karma brand is a strong one, resonates with consumers. Can you help us understand customer acquisition strategy here, go to market? How you drive awareness from here with the Credit Karma brand to take advantage of the existing brand awareness?

Yes. I mean well, we have 120 million members on our platform. And when we say that, we try to not use any metrics. That means that 120 million members have been validated through the credit bureaus with their social security number, their address, their KYC. More importantly, they've been deduped. You can't have more than one account in Credit Karma. So what we have been focused on over the last 17 years have been very successful on that front. But as we expand the brand, what's really important is we're much more beyond credit today. And as we think about the product, it's about expanding into these new alternative verticals, right? So it's credit cards, which is our oldest vertical; personal loans, which is our second oldest vertical; to mortgages; to auto loans; to money. And we think very much about how do we drive engagement on all of those dimensions from a user perspective? How do we add value? So for example, we have a product called Karma Drive, which is actually telematics. So as part of loading up your Karma app, you can give us permission. We'll actually score how you drive, and that driving behavior will actually get you discounts in auto insurance. So the note is we have moved the product from -- much more from just credit and -- credit cards and personal loans to other key aspects of the business. When you think about something like mortgages, which is one of our newer verticals, right, if anyone has bought a home, which I expect maybe you have, you realize what's necessary for that is your credit report, your W-2, your tax returns and your bank statement. Well, of those four big clunky data elements, we have 4 of those, right? So what we can do with that is we can actually simplify the process. And as we think about things like Lightbox, we can prequalify you for a mortgage, but we can also prequalify you for a mortgage refinance, right? And the opportunity there is a lot of times, consumers won't refinance their mortgage because it's painful, right? Even though I know I could save $50 or $100 a month, I'm not going to do when interest rates move down, because I know that I'm going to get harassed, I'm going to have to go and dig up a bunch of paperwork. But our ability to have all this information in real time sort of in connection with the key underwriting models that are driving the eligibility of it, that will be transformative in the space when you add in things like GenAI, the reminders, the prompts and the conversational, why is it a good time? I think that's what's going to disrupt the consumer -- disrupt the industry and help consumers.

Great. You touched on some of this already. But from your view, what are some of the key trends shaping the industry today in personal finance? And what are some of the things that Credit Karma is doing to kind of skate to the puck, if you will, and satisfy those needs?

Well, I think it's so much more consumer-centric, right? It used to be large financial institutions, a lot of multiple products, that tended to be the center of your financial life. And that's moved, right? We all have multiple financial services products. I bet you everyone in this room has at least 3, if not 5 or 10 financial services accounts or interactions. And I think that's an important aspect of it. And then I think data and consumer choice is really the key driver, right? Gone are the days when you were at the behest of the bank and they control all the eligibility, everything was opaque in terms of what you are eligible for, your inability to shop. I think Credit Karma and other companies are actually changing that landscape, right? We're creating transparency so when there are 10,000 financial products out there, you know which one is best for you, which one is qualified, which one you're qualified for, and with the pricing of all those products are upfront. And we think that's what consumers really want, but that's also the key aspect of leveling the playing field when it comes to sort of the inequality around financial services products and sort of the income disparity that we see across the U.S. and the world.

Great. And where are some of the areas you're investing in, in the platform? You talked about some of these newer offerings. Are there others that you're considering adding in different categories? Or is the focus on kind of building on what you already have across the lines of business?

Yes. We've always tried to stay center, right? And if you think about what Credit Karma is. We think about it from 3 key pillars, which are the key aspects of the consumer's financial life. So first is the lending side. So that's the credit cards, that's personal loans, that's the mortgages. It's areas that we have the data in. And the beautiful thing is all of these data elements tend to scale to other categories. So there's lending. There's the asset side of it, right? So that's the checking accounts. That's the investment accounts. That's the savings account. That's the ability to help consumers get into the banking space, build their credit scores over time. And lastly is insurance, right? So these are the 3 key pillars of Credit Karma. And across those pillars, we continue to make investments in the form of data and capabilities. So we continue to add more and more data onto our platform. So things like telematics, which is first-party data on that. We're creating it as you drive, but we're also buying things like claims information so that we can actually price your insurance policy without you having to lift a finger. If you ever bought insurance in the United States, you know that you fill out 40 questions to get one quote. If you want a second quote, you fill out another 40 questions, right? But to have all of that in one place really simplifies and makes it easier for you to compare. And then on that sort of last pillar of our business, which is on the savings and the asset side of it, right? There's Credit Karma Money, which is a set of capabilities that allow us to move money around on your behalf. So when you talk about things like GenAI, we have already built in the capabilities, the API. So when you actually tell the chatbot or the AI to move your money, we have a set of APIs that actually can do that on your behalf rather than saying great, you should use your money now you can move your money through the platform, we can centralize all that. So those are the capabilities, the data elements and also the verticals that we're investing.

Got it. Great. And with the entry into mortgage, auto loan, auto insurance, these are some of the newer lines of business. What have been some of the learnings? Are you feeling like that Lightbox engine is getting to the point where the relevance is getting to that flywheel or critical mass, how you want to describe it. I guess just generally, what have been some of the learnings? And where do you go from here in those new lines?

Yes, I alluded to it earlier. I mean, I think one of the great things is that the data scales across all platforms, right? So the same credit report that we bought 17 years ago that powers credit cards and Lightbox is the same credit report that you can use today to power things like mortgages and auto lending. So that's one great aspect. The platform itself moves from vertical to vertical. So I think those are the opportunities. And at the same time one of the challenges in the space is that a lot of these large financial institutions tend to be incumbent. So they tend to move a little bit slower than what we would like as a technology company. But that's okay. It's sort of -- as much as it is a -- challenge is also the moat, right? To get to scale is important in the space, and that's what we've heard consistently time and time again from our partners that scale, longevity really do matter because when you think about the technology that we're building, when you've been thinking about the relationships that we're building with the financial institutions, it's all about trust. I mean our partners are handing over their underwriting models, right? That's like -- that's the Coca-Cola secret recipe. And banks are very careful with that. But when you do have that data, you create a much more compelling experience for your users. And you also build this level of trust with -- thanks to the financial institution side are hard to replicate.

You touched on the Credit Karma Guarantee. Credit Karma Drive is another newer offering. If you could perhaps elaborate on these new offerings, and what you're excited about there?

Yes. So we have -- I mean, again, going back to this idea that Credit Karma is a lot bigger than just credit scores, right? So Karma Drive is a set of technologies that you can put on your phone, that will actually took -- look at how quickly you accelerate, how hard you stop, how you turn, how often you pick up your phone when your drive, all in the spirit of helping you lower your auto insurance policies. That's one area. When you talk -- we have a product called Home Pulse, which is actually tracking the home equity that you have -- and this is using the same platforms that are actually -- the data that is doing, AVMs, or automated valuation models, that go into refinancing your loans. So not only can we tell you you're qualified, but we can tell you how much equity you have. So you can track that as an opportunity. We have a product called Credit Builder, which you can pay yourself $20 a month. It's completely free. And you, by paying yourself $20 a month, are making a promise to pay yourself $20 a month. We can improve your credit score, and some of the early data that we have on that product is we see, on average, your credit score going up 24 points in as little as 40 days and oftentimes, in the same day, right? So it's just simple examples of driving engagement, building trust, but all with the idea that data, automation... [Technical Difficulty]

TurboTax QuickBooks, where do you see that 1 plus 1 equals 3 with those 2? And what are some of the things you're doing running Credit Karma to integrate?

Well, what's great is when Sasan and I started talking 5-plus years ago, the idea and the mission was really what resonated, the idea that we could change consumers' lives. And that's what we've been following over the last 5 years and just thinking about a couple of the areas that we have innovated on. If you think about TurboTax, where every year, there's roughly $130 billion worth of tax refunds. Well, last year, we successfully drove a lot of those dollars into Credit Karma Money accounts, right? And we are actually -- our 2 innovative benefits that -- and I think only Credit Karma, Intuit and TurboTax could provide, right? We could do 5 days early in terms of your tax refunds, and that's interesting. But what's really interesting is we were able to do refund anticipation deposits where when the IRS accepted your refund, we could give you a portion of that refund in real time for free. And the way that works is because the credit data allows us to build the credit quality of the user that we're dealing with. The TurboTax integrations with the IRS sort of -- and their history with the user base also gives us insights, incredible insights on that user. So instantly, we're able to drive advantage in that space. And then when you think about things like QuickBooks and the idea that something like $2 trillion worth of invoices are set through that platform each year. Well, things like point-of-sale financing become really interesting, payment rails and money movement becomes really interesting across the ecosystem, across Intuit platform.

Wonderful. Sounds great. If you do have a question, feel free to raise your hand. We'll get a mic over to you. If not, I'll keep going. Okay. So Ken, maybe Credit Karma Money, kind of the new concept here for the business. If you could touch on what you're doing there in that end market and the offering itself.

Yes, that's a really great product in that we launched it about 3 years ago. And what we did there was -- what's really important here is Credit Karma is not a bank, right? We don't lend the money. We don't even deposit the money, meaning it's not held into our banking account. So what we do is we leverage the consortium of the banks. So with Credit Karma Money, you get one of the highest rates in the states. It's like -- I think it's roughly 4.2-something percent today. Don't put me on that precisely. But the idea is all of those dollars are FDIC insured up to $5 million because we actually make sure that no one institution is holding more than the limits itself. But the idea is that we've always thought about you should get a fair rate for your money. So it's a product that drives engagement for us. It's a product that makes money from us -- for us in the context of interchange when you use your debit card. But it also goes to this idea that engagement is key for credit card, right? It's a strategic advantage for us. We know that when a consumer uses more than one service on Credit Karma, their engagement retention goes up by roughly 30%. When they use more than 3, that rate goes up -- that engagement goes up to something like 47% more retention, right? So Credit Karma Money is just a suite of offerings that we have that are about driving engagement, driving trust that we've always focused on in terms of helping consumers.

Wonderful. And the long-term revenue growth target of 20% to 25%, what are the keys to getting back to that? Obviously, we're in a tough macro. You've talked about some of the headwinds there. When you think about that, getting back to that level and then sustaining that level of growth long term, what are the keys there? What are the key drivers?

Yes. I mean the good news is that we've seen this, right? We've seen this before. We have been doing this for 17 years, and we have a lot of data in terms of consumer behavior. There's 3 key components. And I would say maybe even a fourth one as you think about sort of the growth of Credit Karma. One is our user growth, right? We continue to add users onto the platform. It's 120 million-plus today. We're getting a large chunk of the 18-year-olds -- the 17-year-olds who were turning 18. So that's an important aspect of growth. So that's one. The second one is really the focus on engagement, right? So 5 years ago, our engagement was probably roughly 3x per month on our active base. Today, it's a little north of 5x. And with all the products, whether it's Credit Builder, Credit Karma Money, Home Pulse, Karma Drive, as consumers engage in those products, they tend to have higher retention rates and higher engagement rates. That's fundamentally important. And then last note is really our revenue per transaction, right? Those have been also going up over time as we've moved into new verticals. So things like mortgage and personal loans as we've grown that business, those tend to have higher revenue points for us. But the other area is as we branch into new verticals, it's the same data that we're using, right? So the same data that is driving and powering the mortgage experience is the same data we've already purchased for the credit card and personal loan side of the business, right? So there's incredible scale in terms of the overall data. But if you put all of those things together, it's our user growth, it is our engagement growth, it is our revenue per transaction. And then it's really the penetration rates of all of the verticals that we've identified. And our most mature vertical today, which are credit cards and personal loans, has something like a 7% adoption rate, right? So there's 93 points left to go. And then some of our more nascent ones are sub-1%, so 99-plus percent to go. So very early innings in terms of the opportunity in the market that we see.

Wonderful. Ken, thanks so much for joining us. Learned a lot here. Great discussion. Appreciate you being here.

Yes, my pleasure. Thanks for the time.

Thanks again.