Intuit Inc. (INTU) Earnings Call Transcript & Summary

Hi, everyone. Joe Gallo. I'm delighted to have Sandeep Aujla, CFO, at Intuit. He's been at Intuit for almost a decade now. Really appreciate you joining us here today.

Thank you for having me, Joe.

I think most people probably know what you guys do, but since it is a room of generalists, maybe just give a very brief description of the business that you've built.

Sure. We're in the business of delivering confidence to consumers and small businesses. We serve 100 million customers, 90 million consumers, 10 million small businesses. And on the small business side, our brand QuickBooks is a trademark that we go with, and it's a set of offerings that help small business -- small and midsized businesses run their business, everything from managing their books to paying their employees and getting paid themselves, getting access to capital loans and getting advice. So it's, in essence, covering the set of needs that a small business has to run their business. On the consumer side, our largest consumer business is TurboTax, which helps folks in the U.S. and Canada get their tax filings done. And on Credit Karma, we're helping people make smart money decisions and get access to financial products that are the right set for them. Overall, the business is a little north of $16 billion in revenue. Over half of that is small business and Credit Karma is about 15% and about 35% being the TurboTax business.

Awesome. That's a helpful overview. We were talking about it in the session before you, but it's certainly been a volatile earnings season, right, where most people are [ hoping ] to survive, not thrive. Like there's definitely confusion around the earnings print. Maybe just talk through the top 2 or 3 things that investors should be focused on or do you think people are missing?

Yes. The top 2, 3 things I would take away from the earnings call. First and foremost is we raised guidance. And you mentioned the uncertain economic environment that we are all managing the companies through in such an environment, we increased our revenue growth guidance, we increased our margin guidance. So that's the first and foremost you should take away. Second, over half of the business, as I shared earlier, is the small business group. And that business has printed 18% growth over the last couple of quarters and the online ecosystem, which is the growth -- where the growth catalyst of our business is growing at a 19% base and our customers are continuing to adopt our offerings. We shared at the last earnings call that our payment volumes were up 22% last quarter. So that's the second thing you should take away is the strength and the resilience of our portfolio. The third thing on the consumer side is we are making strides, penetrating the $20 billion assisted tax addressable market. That part of our business grew 17%. It's now $1.4 billion and represents about 30% of the Consumer Group's revenue. All 3 of those are things that bolster our confidence in our ability to continue to grow this business at a healthy clip in the years ahead, and that should be the key takeaway from the Q3 earnings.

You've taken a lot of share in assisted tax, your TurboTax Live units were up 12%. I think full-service customers doubled year-over-year. I think you've noted less than optimal conversions on inbound traffic. How confident are you that you can kind of rejuvenate that or improve that going into next tax season?

Where confidence comes from as a management team is, what are the things that you control and what are the things that are outside of your control. So let me share what are in our control and what's giving me confidence. Our Credit Karma business has over 40 million monthly active users. Most of them get their taxes done through the assisted tax methodology. That, in essence, is the analogy I would use is for us fishing in a barrel, so to speak. And we need to drive a smooth, seamless better to get experience. This past tax season, we had north of 10 million customers from Credit Karma come to our TurboTax properties and only 1/4 of them could get a seamless experience. And even on the quarter that got seamless experience, the app performance wasn't up to par. Those are both things that are addressable by us and our engineering team is all over it and our expectation is going to be [indiscernible] better in the year ahead. So that's one. Two is, again, related to the assisted category is a shopping experience. We are evolving from being a software-based digital shopping experience to a service-based experience. And that's in our control as well, how do we evolve their shopping experience to where when you come to our properties, you're not just given a set of choices around with SKU to pick because that's now how people make their decisions when they're picking a service. You come, you engage with the service provider and then you get total price. So that's in our control. Thirdly, what we've learned this past year is, when we showed up locally, when folks went to Google or their search engine of choice and they typed in, help me find a tax preparer near me. And when we showed up, invest those searches, that conversion was augmented to higher and the team is making progress. We weren't all the way green in terms of where we needed to be in showing up local, but that's an area over the next coming months, I expect us to have much more coverage. So those 3 factors is what continues to bolster the confidence about growth in tax going forward.

And then maybe just taking those 3 factors, which we all make a ton of sense. How does that materialize in TurboTax growth, revenue growth, especially given the TAM, I think it's $21 billion is massive. So how should we think about the financial impacts of that?

Sure. The overall TAM of the TurboTax business is about $35 billion, the $21 billion being on the assisted category, which we're just starting to penetrate. We have about $1.4 billion right now in that market. And the way you should think about it is that $1.4 billion that represents 30% of the TurboTax revenue that continues to grow at a very attractive rate in the years ahead. And the areas that gives me confidence that it continues to grow at a very attractive rate, are the 3 areas I mentioned earlier. The better together with Credit Karma, are we thinking our shopping experience and doing better on showing up more locally. So that's how I would think about it.

I think this was the first year you had small business tax. Any learnings? What's been the biggest feedback so far? And then when can that be a material contributor to your business?

Joe, the last part of the question is still a nascent offering for us. I would still consider that kind of in beta so to speak, it's not a material contributor to us, but let me share the learnings. The learnings were quite significant on the new customer acquisition through TurboTax that was actually surprising how many new customers we got through on that way and on the QuickBooks side, it reaffirmed our thesis that we are helping customers get all the way to having a very clean set of business books. And it's just a click away to getting them to get their tax filings done. And that value proposition really resonated. So we got good uplift there as well. But I would underscore this is a still early part of our business, and it will probably be a few years before it's contributing at a level that's material given the size of the company we have.

Makes sense. Maybe just staying on the small business segments. We talked about macro in the session before and SMB remains really weak. I mean how would you describe the relative health of your small and midsized business customers? And then is there any difference in U.S. versus rest of world that you're seeing as well?

So a couple of things to keep in mind. Let me start with the business, and then I'll get to you the macro aspect of it. The one thing that's important to keep in mind about our business is 80% of it is subscription based. So our financial management software, that's completely a subscription-based offering. Our payroll offering, a majority of the revenue there is subscription based, and then there's a per employee fee. And then the areas that are now subscription-based are payments, but we have a lot of untapped opportunity to continue to penetrate that. That's why even in a somewhat slowing or a challenging macro environment, our payments volume grew 22% last quarter. So that's an important aspect to keep in mind when you look at our business and our ability to manage that and for the business to stay resilient regardless of the economic environment. Now let me touch on the economic environment, which I would say the small businesses are doing better than they were doing in the pre-COVID era, both in the U.S. and the U.K., and which is great because for both of these countries, small businesses are about half of the GDP, the employee about half of the workforce. So it's good to see them going well, but there's a mix in there, which is some areas such as auto mechanics are doing better. I think Wall Street Journal had an article recently that people buying a few new cars, guess, who's the beneficiary to auto mechanics. Service-based businesses are doing better and was not doing as well as folks in the real estate market, as an example, just given where the rate environment is. But small businesses are doing well. Their profitability is up over the last 6 months. But what is giving us pause is that the cash reserves are down than where they were about a year ago. So that's something that we are watching carefully as we help them navigate. The last aspect I would say is for a company like us, when you are supporting 10 million small businesses, you have a lot of inherent diversification built into your business, both in terms of the size of the business, you are supporting everywhere from those who are self-employed or solopreneurs meaning no employees all the way to those who have hundreds of employees. You have diversification across the geographies that you cover. You have diversification across industries that you cover. So that's another inherent aspect of our company that's important to keep in mind as you look at our ability to navigate through any economic environment.

And so you think you have -- you've obviously shown tremendous execution. I mean your 18% growth in that small, midsized business outperforms all of my coverage. How do you think about the visibility and the resilience going forward or all the factors that you talked to still applicable as we move into next year and beyond?

You touched on execution, Joe, that's an area that we push our teams on because really what differentiates an excellent company from a mediocre company's execution and execution in each strategy every day. And that's what we focus on. When we talk about our Investor Day about our operating system, when we talk about how Sasan and I engage and the entire leadership team engages across the business is a focus on top-tier execution. And that is what's showing up in the results that you're talking about. That's execution around retaining our customers, both on the consumer side where we talked about retention was up 3 points. On the small business side, where retention is amongst the best in a small business landscape. It's about penetrating those customers with new service offerings. It's about going into new spaces such as assisted tax and mid-market. So execution is a differentiator and that's where my confidence comes for our future growth.

In that execution, the mind share dominance is abundantly evident in the United States. How do we think about driving that mind share and just larger share internationally as well?

International is the one area where I'm not happy with our performance, quite frankly. And that's an area that we are focused on having a different set of outcomes over the coming years than over the last few years. And let me touch on 2 areas why. One is Mailchimp. One of the surprises -- a pleasant surprise during the Mailchimp due diligence process was that they had half of their revenue internationally, purely by happenstance. They had not focused on a localized product or localized go-to-market motion. And since the acquisition of the Mailchimp business, we have translated the product into 5 languages and we're building localized go-to-market motions in the U.K., in Australia and working with marketing agencies in other geographies. So that's one. And two is that we are making a very deliberate set of decisions around allocating engineering and product resources to building products for the international markets to really nailing the last mile that a compliant industry could feel like the last 5 miles. So those are the two areas that I believe will drive a different set of outcomes internationally over the coming years.

That makes sense. And since you brought up Mailchimp, I mean, what have their earlier results been with cross-selling that with QuickBooks?

Let me step back and share the 3-pronged thesis that we had when we did the Mailchimp acquisition. First and foremost was that by combining the power and the data we have in QuickBooks with the data in Mailchimp, we could create an end-to-end loop that no other market participant could replicate because we would not just know how the marketing campaigns performed, but we would actually have insight into the profitability of those campaigns and the profitability of the business as a result of those campaigns. So that's one. Second is that Mailchimp used to have a culture where they would celebrate people graduating. And we said, well, I don't celebrate people leave in my business, I'm going to grow with them. And we felt that we had an opportunity to really scale their business into the mid-market. And third was international. That's the point I touched on earlier, a discovery that we had during the diligence process. So let me touch on each of those. On the better together with QuickBooks is more about a focus on product integration as opposed to cross-sell. It is how do we build CRM customer relationship management capabilities in the QuickBooks that seamlessly link into Mailchimp and help drive discovery and adoption of those -- of that offering. And vice versa, how do we make sure that the Mailchimp customers are discovering QuickBooks and are able to benefit from the end-to-end data loop. And we'll have announcements in the coming weeks and months around some of the unique things that we could do, but taking our data set across those 2 platforms and delivering experiences that no one else can replicate in the marketplace. So that's one. Two, on the mid-market, our focus in terms of addressing the mid-market customer, having a human-assisted onboarding experience is yielding a higher percentage of our new customers being mid-market and mid-market customer retention being higher than it's been in the last few years. So that's also bolstering our confidence and the opportunity for Mailchimp going forward. And third, you already touched on the work we're doing internationally in terms of translating the Mailchimp product into 5 languages, [indiscernible] localized go-to-market motions. So that -- I know your question was more around the cross-sell, but it's a multipronged approach in terms of how we are scaling our business growth by using the Mailchimp asset.

That response is perfect. And it leads me right into the mid-market. How do you think about Intuit's ability to serve the mid-market, both from a product feature perspective as well as the go-to-market side?

Mid-market is an area that we've been working on for a while, it's been a gradual improvement. When -- I remember when I was in the small business group, and we had this discovery that we were one of the key feeders of new customer acquisition to some of the -- our competitors to just NetSuite and Sage and I can tell you that was more than annoying. And we're like, well, why should we be a feeder to them? And we already acquired this customer, why not grow with them. And we actually asked the team to go do the work. Why do people leave? How big of a shift is us? And what we realized is that there was not a step change in the -- what we had to develop to drive some of these improvements. These are things like now these customers have multiple branches. They have multiple entities. They do multicurrency. They're moving more money. So it's a different type of risk management offerings. And we started working out building those capabilities on the product side. And I feel pretty good about where the product is. You never get 100% because your competition keeps moving, and you need to keep moving, but the pace of progress that teams are making has been quite pleased. I'm quite pleased with it. And now we're focusing on the go-to-market motion. We are building an account management, business development team that is focused on the mid-market and these are not salespeople with street -- feed on the street, but more of a digital pay sales force. So that's the area that's the next step of really building the go-to-market motion and scaling it. And I think that, that's going to really help unlock the go-to-market -- the mid-market for us.

You mentioned some of your competitors. You guys have always been disruptive on pricing, but how do we think about your differentiation more broadly versus some of those?

I know in the mid-market side. So pricing is one, but pricing is just a small component of it. The biggest factor is if you want to leave QuickBooks and go to some of these other offerings, is a huge step up in terms of the hassle of embedding those offerings. They come with a whole setup and everything else that you have to do and they're much more complex to train the employees on. We already have the customers. They are already used to the product offerings and really helping them continue to scale with a product that makes it much more sticky. So that's the biggest thing, which is the customer is already here. Customers are already deeply familiar with the product and helping them scale with it is a competitive advantage. The second advantage is that we have a lot of offerings that are already in-house. So if you go to one of these other financial management software providers, sometimes you have to go outside to go get a third party to go run your payroll, for example, or go do your money movement. We could do that all in-house. And that creates a unique set of synergies in terms of the offerings we can provide when you have your entire book of business with us in terms of we know your money in, money out. We know when you're paying your employees, we know the marketing campaigns, you run and that creates a flywheel of what we can offer you and opens up the aperture but we can offer you that I think any stand-alone business is going to be hard-pressed to do. So I would say the competitive advantage, Joe, is around pricing. It's around unlocking the full breadth of the platform. And third is just the ease of use, QuickBooks a lot ease of use than some of these other offerings.

That makes sense. And so I've made it almost 20 minutes without asking about AI, so I'm proud of myself, but maybe.

Is that a thing these days?

Maybe it depends on what you ask. But -- so you guys are one of the few companies that I think in the near term, have a real opportunity to kind of infuse and benefit from AI. But maybe just holistically, how do you think about your AI strategy?

One thing about AI is we declared AI late 2018, early 2019. And I remember when we declared our AI-driven expert platform strategy, the first question I would get from many investors were like, what the heck is that. And the dialogue has definitely changed since the last 2 years. But what that means is having declared the strategy 5 years ago is that we've been investing in AI, in knowledge engineering, in machine learning, in cleaning up a data set well before it became fashionable to focus on AI. So I feel that we are well ahead of the curve there. And really, the competitive advantage in AI comes from data set. We have data on 100 million customers. We have about 0.5 million attributed for a small business. We have about 80,000 attributes per consumer. And that data sitting behind the firewalls, right? So that is the data that we can train our models on to really deliver a set of experiences that is hard for a third party using publicly available data to be able to do. So that's where I feel good about the progress the team has made in building our own large language models. I feel good about the progress the team made in delivering experiences and using AI. We have 24 million customers in TurboTax use AI, and we saw better conversion retention. We are experimenting with AI in Mailchimp and QuickBooks and those offerings are resonating and we have early green shoots in what they can do in driving trialer to gross new subscriber conversion rates as well as driving retention rates and discovery of our offerings such as payments and payroll. So these are all areas where that early leg up in moving in the space of AI has positioned us quite well in unlocking the opportunities there.

So on the Intuit AIs, other tangible early proof points? I think you mentioned a few of the...

So I mentioned the one around TurboTax. The other one, which is in beta is -- right now is helping customers onboarding to QuickBooks. QuickBooks could be a bit cumbersome to onboard into, but one of the things we are experimenting with is you link your Gmail, you link your website and you connect your bank account and we can help you onboard in a seamless manner into QuickBooks. Another example, we are experimenting with right now, and I use an example of a cater, you asking about running your business and you're on an e-mail thread with new prospective clients. Going back in terms of what catering jobs, et cetera, they need. Typically, these caters will then come home at the end of the day, a tough day, sit down and go through those threats and turn those into either estimates or invoices. Now we give them a unique QuickBooks e-mail address. So they just simply forward that thread on to their unique QuickBooks e-mail address. They go home, and QuickBooks has done the work for them to where they log and say, like, hey, on this thread, I think the customer is looking for an estimate generative assessment, do you want to do a quick scan. So what would have historically taken maybe 20, 25 minutes, now it takes maybe 2 to 5 minutes, you said like, oh, yes, I see this. This is the right thing. And that drives both retention as well as discovery of new offerings because we say send out this invoice and of this estimate and would you like to make it pay enabled. So that's on the QuickBooks side. In Mailchimp, we see significant opportunity to helping customers run marketing campaigns that are more effective in driving conversion using AI in terms of the messaging, in terms of segmenting their customer base, in terms of knowing seasonally when to start running campaigns to get ahead of that. And that's going to drive more money in the pocket of our customers and that we benefit from because that makes the product more sticky. And over time, as we show that the AI-driven marketing campaigns are yielding a high conversion uplift, then the human-generated one, we earned the right to have a separate SKU that we could price higher. So these are some of the top of mind examples I would highlight that is giving us confidence and the opportunities we have with AI to unlock value for our customers and thereby unlock values for our business.

So we've spent most of today talking about execution, resilience drivers of the business. Maybe flipping to the profitability side, margins have expanded, I think, 400 basis points from fiscal '22 to fiscal '24. How do we think about the cadence of future leverage? And how should we -- I think we're comfortable with the growth profile, but how do we think about margins as well?

Finding operating leverage in the business while continuing to scale our revenues is definitely an important part for us as a management team. And one of the things that we've talked about for years is our set of financial principles, which is we like to grow our revenue faster than our expenses, thereby leading to margin expansion. I continue to have confidence in our ability to continue to scale that. As I look at what's giving us that operating leverage is our ability to operate technology, customer success and marketing as one single platform across the company. If you go back 5 years ago, each one of our business units had their owned technology team had their own customer success team and the entire end-to-end marketing function. We have now centralized that a lot. So we're getting synergies such as AI, you build it once and you leverage across the entire business. Your live offerings, such as TurboTax Live, QuickBooks Live, that's based on the same platform that's run by the same team, run by the same technology team, run by the same customer success team. So that operating leverage that we built into the business should continue to yield improving margins in the years ahead.

And then -- so GenAI is probably -- it's a net benefit to your margins, you would say because sometimes there's a heavy cost as well. So I'm just curious.

The way we are advantaged in GenAI is one is that we use third parties to run our processing, largely Amazon and, to some extent, Google Cloud. And that means that we are not out there bidding for these chips and driving up our cost. Secondly is we have our own large language models. Remember, I talked earlier about all the data sitting behind our firewalls, where we train our own large language models on that. And the advantage of these models are that they're driving better, more relevant answers, less latency and I don't have a per click cost to you on them. So in terms of the cost structure, we are quite advantaged in terms of leveraging GenAI for our business. So I don't see GenAI being a meaningful headwind in terms of my ability to continue to expand margin for the company.

Great to hear. Sandeep, I really appreciate the time today. Thank you.

Thank you, Joe. Thank you. Appreciate it. Thank you, all.