Intuit Inc. (INTU) Earnings Call Transcript & Summary

Okay. Hello, everyone, and welcome to UBS' tech and AI conference. My name is Taylor McGinnis, and I head up the SMID-cap application and SaaS coverage here at UBS. And with me, I have the CFO of Intuit, Sandeep. So Sandeep, thanks so much for coming to our conference.

Well, Taylor, thank you for the invite. Pleasure to be here.

Awesome. Perfect. And before I start, I just want to let everyone know, if you have a question, there's a QR code right in front of you that will give you access to send the question to me. And if there's time at the end, I'll make sure to get some of those addressed. So with that, let's dive right in.

Let's do it.

Perfect. So I think a good place to start would be just in terms of what you guys are seeing in the demand environment, right? So across some of the SMB exposed software names, I think there was some signs of green shoots or maybe things getting a little bit better. Maybe outside of your Mailchimp business pretty much across the board, growth was solid. So could you comment on what you guys are seeing in the environment? How much of the outperformance was really driven by your own execution, right, versus maybe some unlocking? And then also to -- not to throw too many questions to you, but when you think about the sensitivity of your business to a recovery, what should be things that we should be looking out for?

Sure. Let me address the 3 parts in the way you -- in the order you asked them. On the economic environment, I would say it's stable with a lot of optimism in there. We're seeing the interest rate environment starting to get better as the Fed cuts rates. There is expectation of the regulatory environment getting better. And for someone who serves entrepreneurs, if all of a sudden the regulation to open up your own business, to open up your own salon, to open up your own restaurant start to improve, you should see a high level of entrepreneurism and that should help our Global Business Solutions Group over time, and that is about 60% of the company's revenue. On the Consumer side, we are -- on Credit Karma, we're seeing partners leaning in more towards extending offers. And that has to do with both our own innovation as well as what they're seeing in the demand environment and the market environment, personal loans being a big contributor there. And historically, those customers were unsure about the rate environment. Now the rate environment is getting better and they're leaning in and many of them are testing and leaning in even more so than prior quarters. So net-net, I would frame the macro situation is stable with a lot of optimism and excitement for their near-term opportunities to improve. Your second phase of the question was, well, how does that impact our business? So in the near term, if you think about the Global Business Solutions Group, 80% of the revenue is subscription oriented. So that makes that business nicely insulated in a downturn. That means on the upside, it takes a bit of time for that upside to start showing up in that business. But where we should start seeing more near-term benefits is in our payments business. We processed about $125 billion in payments last year, in volume growing by 20%. And as the economy comes back, you should see those volumes and those invoices continue to improve. In the Consumer business, you'll see partners continue to lean in. They're testing right now, but they should get more confidence in the ROI and that testing becomes more durable and that spend becomes more durable. So Credit Karma and the payments business is where we will start seeing those improvements. Remind me of the third part of your question.

The third part was just on -- which I think you addressed pretty much, but was just on the sensitivity, right? So is this something that you'll need an improvement in the environment and then you'll see the benefits to your business with a lag? I guess how should we think about those moving pieces?

So on the Credit Karma side, I would say it's 50-50 macro and our own work. The team at Credit Karma just have done a phenomenal work as they really embedded Intuit Assist throughout the product. And that's now customers are able to better understand why this is the right offer for them, that's driving lift in monetization versus the control group. They've done a great job adding more segments. The insurance segment has been doing really well starting Q3 last year, and that trend continues. And to set context, you know this, but for the audience, Credit Karma last Q1 was declining 5% in revenue. It exited the year last Q4 growing 14%. And this Q1, it grew 29%. So that's the context for some of the benefits that we're seeing in Credit Karma. And on the Global Business Solutions Group, a lot of that has to do with the great work that the team is doing going upmarket and really making our services offerings resonate with a broader set of the customers.

Perfect. That was great context. And maybe just to dive a little bit more in terms of what this means for the numbers. So when we look at the 2Q revenue guide, very impressive and implies a strong acceleration. You guys talked about how Consumer is expected to be down low single digits. So when we think about where that strong acceleration is coming from, whether that be Credit Karma being able to maintain the double-digit growth that we've seen or more of that coming from the Global Solutions business, how would you unpack that?

Sure. Overall, we came into the year confident. What we saw in Q1 bolstered that confidence. So that's the key theme that you should take away. So in Q1, we saw 20% growth in online ecosystem. That momentum should continue. That's the largest subscription-based business, and that momentum should continue. Desktop declined about 17% in Q1. Desktop returns to growth in Q2, and that decline really had to do with some product offering changes we made about a year ago, and that changes in terms of the revenue recognition, and that returns to the growth. So the momentum in Global Business continues and likely gets a little better. On the Credit Karma side, we continue to feel really good about the underlying trends in the business. But one thing to keep in mind is we are coming into the holiday season. And so there's a seasonality associated with the business, which is people aren't thinking about engaging with the platform during the holiday season because they're spending time with family. So aside from that seasonality, we feel good about it. Now let me address the consumer area because that's where -- the TurboTax area because I've had a lot of questions. One is we made a change to the promotional cycle. Historically, think about when you walk into -- an example where you walk into Costco, you would see our TurboTax product on sale typically from mid-December to mid-January. And what we realize is when people walk into the store in December, they think about picking up a box of LEGOs for the kid, not necessarily picking up a box of TurboTax. So we simply changed the timing a month later. It runs from mid-January to mid-February. And it just so happens that a quarter ends right in the middle of that. So the revenue simply shifts a quarter and it was very much a strategic decision based on how the consumer behaves in the buying pattern, but that drives a little bit of that shift. The second thing to keep in mind is Washington, D.C. is going to be pretty busy around January. And I'm not sure you want to assume that IRS opens up earlier than what it has in recent years. So that's another thing to keep in mind because our quarter ends again, November -- sorry, January 30. So when the IRS opens, it also has implication to Q2 versus Q3 revenues.

Yes. That makes a lot of sense. I know I'm in this holiday season, not trying to think about my taxes and to try to take advantage of the good shopping deals out there. So that resonates.

I'm getting warmed up as well after having taken Thanksgiving week off. So it resonates, yes.

Sure. So maybe going back to what you talked about on Credit Karma, right, and maybe there being a bit of seasonality because I know we were getting questions on amazing like acceleration in growth, 29%. Why not raise the full year guide, right? So to your point, maybe there is some seasonality, maybe there was something onetime-ish in 1Q. But can you just elaborate on that? Because I know I think for 3Q, you guys tend to see a good bump from Credit Karma there. So just the puts and takes, I think, would be helpful to run through.

Yes. First, let's step back and look at the overall Intuit Inc. business. We have about 1/3 of our revenue coming from TurboTax. That's largely a Q3 business. So going back a decade, we have a general principle about not raising our guidance before we get into through the tax season. So that's one context to very much keep in mind just how Intuit has behaved in terms of the seasonality of the overall company. In terms of Credit Karma, we're seeing good momentum coming in on Q1. But that business, we are seeing some partners test. And we want to make sure that the testing is durable. We're optimistic about it, but that's just something we want to see through. We take the guidance we gave you [ and I say-do ] with that guidance extremely seriously. And that's some of the context in terms of the question behind the question, which is seeing the strength, why didn't we change the guidance? It's just our historical practice, and we want to make sure that these trends -- these tests are really durable.

Yes. Totally makes sense. And then when we think about the 20% reiteration for online ecosystem growth this year, so if we take price and some of the headwinds that you're seeing in Mailchimp, if we put that aside, what is driving that comfort in that growth profile remaining durable? And when you think about the sources of potential upside there, is there any businesses within that, that you'd flag in particular?

So online ecosystem, 20% growth Q1, we indicated 20% for the full year. In Q1, that was a 2-point acceleration from Q4. What's driving that is, one, the pricing is resonating. I continue to be surprised. When we do price changes, we have assumptions in terms of what's going to be pricing-related attrition. That came in order of magnitude lower than what we had expected. We have assumption around pricing-related suppression to new customer acquisition. That we realized we were too conservative. That indicates that a long-standing tenet of pricing our products for the value that they're delivering as well as the value that the customer perceives they're getting is holding true. So that's something that's giving us confidence. Two, the shift upmarket. We highlighted that in that 20% online ecosystem revenue growth mid-market as reflected by growth in QB advanced and growth in Intuit Enterprise Suite was up 42% compared to 36% last year, right? So that is giving us confidence about the mix shift upwards. And these higher end customers tend to adopt our services at a greater scale and none than the typical smaller customers. And one of the metrics we shared at Investor Day was in QB Advanced as a proxy, you see that payroll adoption is 12 points higher. Payments adoption is 9 points higher. So now -- and that's largely a digital product. Now in IES and Advanced, we have a sales force. Now that sales force could highlight the benefit of the platform. So you should see better adoption of the services as well. So going back, pricing resonating, move upmarket and adoption services was giving us the confidence in the 20% for the full year in online ecosystem.

Perfect. Let's talk about Intuit Enterprise Suite because that's been one of the most exciting announcements that you guys have introduced over the last like few months. So in terms of how you're thinking about that opportunity, overlap with some of the ERP players out there, could you help quantify that a little bit maybe more for the audience? And then I think you mentioned this a little bit, but the potential for online services attached to be much higher with Enterprise Suite. So anyway, I guess, any early insights from the customers that have adopted it that you could share?

Sure. If you look at our Global Business Solutions Group, it's about $180 billion TAM. And that TAM is basically split almost 50-50 in mid-market versus the smaller businesses. In the mid-market customers, the way we define it, those making over a couple of million in revenue, having 10 to 250-ish employees, and we use employees as a proxy for the complexity of the business. There are about 1.9 million of those customers in our priority markets. Of the 1.9 million, 800,000 are already in our ecosystem. Is order of magnitude easier for them to upgrade from what they're using today to IES instead of migrate from QBO to an ERP that's outside? That migration is a painful and expensive process. And that's what's resonating. When we reach out to these customers, when our sales force reaches out to these customers, the conversations are going quite well. The value of being able to get the insights across the whole business from IES is resonating. The cost proposition is resonating with them. And then some of the conversation around driving the -- or adopting the services is actually they're early, but they are going well. The typical sales conversation could go like this, which is we reach out to the customer. The customer has, for example, this RV park has 8 locations that we talked about at the earnings call. So we call those 8 entities. They had multiple subscriptions to QBO, and they used to use a fractional CFO to get the insights across their whole business. By using IES, all that comes into one platform. They get to see the insights across their whole business, get a set of dashboards that are relevant to them to help them run their business better, make faster decisions. And instead of waiting multiple days to get the insight at the end of the month, they get those insights in 5 minutes. So that's the value proposition. And now you have the conversation about adopting payroll payments and they're like, "You know what, some of those conversations happen right away," others they're like, "Let us get used to this and let's have another conversation about a month or 2 months." So all in all, we've seen good adoption, good ARPC uplift and it's giving us a lot of confidence about the opportunity there ahead.

Perfect. And then another key investor question on this. Is the level of investment needed to be successful with Enterprise Suite? So I think you guys mentioned on this most recent earnings call hiring over 200 outbound go-to-market employees. So when we think about where that goes from here, do you need a lot more investment in that? Should we continue to think about that number accelerating in the near term? Will growth be more gradual? And what does that mean for the level of sales and marketing expense as a percentage of revenue in the medium term?

Yes. What has changed with IES is that's no longer just a digital acquisition. When you're going after Advanced, when you're going after a typical QBO SKU, it was all digital. Almost talking to a human was considered a flaw in that funnel. With IES, you have a consultative sales process because these customers want to have a conversation, why is this the right offering? Why should I have paid much more than I'm paying right now for my QBO? And for that, we are hiring the salespeople. But what does not change is the focus on ROI and payback periods. We are -- we have about 220 people right now across sales and sales ops and bizdev and that sort of mix. But you should expect that to scale as we continue to prove out the ROI and as we continue to see good payback period. So the discipline that we've historically had on the digital funnel, that discipline does not go away with our move towards the human-assisted sales process.

That's really helpful. And then on that, we've gotten a lot of questions on how we should think about the seasonality of expenses this year. So when we look at the first half of this year, it seems [ a lot lower ] non-GAAP EPS growth than we've seen historically. And when we translate that to what it means in the guide, we estimate that maybe it implies OpEx growth around 19% to 20% in the first half and then that going to maybe somewhere in like the mid-single digits or so in the second half. So just in terms of -- can you just walk us through like what -- is it just this year is a little bit more front-end loaded in terms of the expenses? How -- is this typical seasonality going forward? How should the audience think about some of the moving pieces this year as it relates to prior years?

Absolutely. So the first half growth, I think, is in the 17-ish percentage. And you're right, the second half growth rate decreases. A couple of things to keep in mind. One is we started investing in the sales force towards the back half of the year and started investing in AI towards the back half of the year in terms of hiring people there. So you'll start lapping some of that as you get into the second half of this year. The other thing to keep in mind is we talked about Credit Karma, so I'll start there. Last Q1, it was declining 5%. When it's declining 5%, you're not investing in marketing, right? This year, you're seeing partners lean in and you lean into marketing because you're seeing some amazing payback periods and ROI on that spend. So that spend is different than what it was last Q1. Second thing is on TurboTax. We've historically done our advertising campaign starting in mid-January because when you do-it-yourself tax category, that's when people really start thinking about doing the taxes because the W-2 starts showing up in the mail. What the team realized is on the assisted tax category, about 30% of the people make decisions on how they're going to get their taxes done next year before December. Because they just had an experience with their current tax filer that just wasn't ideal, they're at the moment just thinking about who else. And we leaned into some of that earlier spend, and we saw some really good results in terms of what we internally call headlifters, prior year-assisted tax customers coming to our website, considering us and engaging with the lineup and the offering. So that paid good dividends in Q1. That's why we continue that into Q2. The last and the smaller part is on the Global Business Solutions Group. Last year, the team did a test to say, let's lean into higher spend during busy season, which is really January through end of February. And this year, the team under leadership of Greg Johnson felt that it was better to optimize the spend throughout the year. So the full year spend doesn't necessarily change as much as the timing of the spend change. And across all 3 of these areas, it's really the timing and the mix of the marketing per quarter that's changing. But the full year, it should be largely in line with what the historical trends have been.

Perfect. And then I think there was an expectation from some investors going into this last print that with some of the layoff activity that you saw in the summer time frame, that you might see greater than the 50% of margin expansion that's implied for this year. So in terms of the puts and takes there, I guess, one, is the plan to reinvest, right, a lot of that back into the business? And then when we think about the offsets, right, are there areas of -- because it sounds like you guys are doing a lot of investment across key strategic growth areas that are obviously important long term. But are there any areas of operating efficiency or cost efficiency that are still to be had in the business that you guys are focusing on?

Absolutely. I think in terms of the org changes that we made, about the approximately 10% reduction around the July time frame, one thing to keep in mind is head count was increasing last year as we're investing in these opportunities. And we saw an opportunity to rethink where we could rightsize the investments. So Q1 to Q1, head count is largely flat. So it's not like down. I think that's one area that investors maybe extrapolate a 10% reduction. I mean head count is down Q1 to Q1, it's largely flat. So that's one thing to keep in mind. And secondly, we started setting up the hiring functions, investing in some of these areas in parallel to making those changes. So it was not a standing start. When we started by investing in Intuit Assist, investing in live expertise and embedding live experts throughout the platform, investing in mid-market sales motion, investing in international, these are all areas that we started scaling, and you saw that investment come to fruition starting in Q1. So that's all investment we feel good about. That's very much in line with our stated strategy, very much in line with where we see good ROI. And so it's basically us keeping over the [ say-do ], and I think maybe investors didn't take as face value that [ say-do ] was going to be there starting as early as Q1.

That's really, really helpful color. And then just as we think about what this means for longer-term growth, so as I mentioned earlier, a lot of these investments sound very strategic, right, to what you guys see as big bets going forward. So in terms of when we could see the fruits of that, when you look across Consumer and the QuickBooks business, when for these varying investments, could we start to see that really start to contribute to revenues or some that might happen earlier, some of that might take a little bit more time? How would you characterize all that?

So we -- you should expect us to have a -- make a payment on those basically every quarter. So when we said Q1, 42% growth, that's just giving an indication of how that's performing. You should expect us to give you an indication. In terms of it's taking time to scale it and '26 -- fiscal '26 onwards, you should continue to see that continue to scale and continue to pay dividends. But we will be sharing, and we are starting to share already with our Q1 results, how we are performing on these areas, and I continue to feel good about those. But these are long-term durable investments. It's what bolsters our confidence in our ability to continue to deliver on those growth algorithms we've given you, 15% to 20% Global Business Solutions Group, 6% to 10% interim on the TurboTax business and 10% to 15% Credit Karma. This simply bolsters our confidence in that area.

Perfect. And then maybe shifting gears to the Consumer business. So if we look at the high end of the revenue guide for Consumer, it's very similar to what you did last year. So based on our math in order to get upside, and correct me if I'm wrong, but you might need to see a modest acceleration either in TurboTax Live or the DIY business. So when you just think about where you could see -- where you see the most opportunity based on some of the initiatives you guys have in place here, I guess, what are you most excited about? And then as a second part to that question, what is Intuit doing that's different? I know you talked a lot about like the promotional side, right? But anything else beyond that, that's different this year than last year that's giving you guys a lot of that optimism that we heard on the call?

Yes. What we are doing in the Consumer Group is threefold. We want to win in DIY. We have 80%-plus share of the dollar TAM in the market, but we still see opportunity for us to continue to take more share in that market, and I'll touch on that in a second. Two, we want to disrupt the assisted tax category. It's a $20 billion-plus tax category, highly fragmented, highly antiquated, inefficient market that I think with our technology, with our capabilities, we could disrupt. And third, deliver better to get the consumer experience between Credit Karma and TurboTax. That's the overall strategy. So let's click into that, starting with the DIY category. What we realized last year is that we serve the more complex customer really well. We had about 12% growth in the more complex customer. But those making under $75,000 a year, we didn't serve as well. They would come into a lineup and they would start from free and they would quickly move up to $100 SKU. That was far too high of a jump in the lineup, and we could have done a better job. You should expect us to do a better job. And we tested some of the things during the October 15 extension deadline, and we feel really good about the results. So that's on the DIY side. On assisted, that business grew 17% revenue last year to about $1.4 billion. It represents about 30% of the Consumer Group revenue right now, and we see opportunity for us to do a lot better in local. That's a key catalyst for growth there. There are 6 million Google searches that happen every year, tax preparer near me. We just weren't showing up that much. You should expect us to show up in a meaningful portion of that this coming year. Secondly, the better together with Credit Karma. You got 45 million monthly active users or 40 million-plus monthly active users in Credit Karma that many of them are doing the tax-assisted way. We should be able to have that seamless unlock, and we weren't all the way green on that last year into TurboTax. So that's going to drive that improvement. And thirdly is on assisted tax. What we saw is when we got you connected to an expert, your conversion was about 82% or thereabouts. Your PRS was about 85, which is a really solid PRS, product recommendation score. And we are going to use AI and other lineup changes and other product experience changes to get you connected to an expert even faster and even the more right expert for you. So if you're a crypto investor, et cetera, we'll make sure we get you to an expert that has expertise in that area. That should improve the results there. So those 3 prongs should help us deliver those experiences better. And lastly, with the better together platform, we'll make sure you get access to your refunds a lot faster. And if you're with Credit Karma, you have your accounts there, your bank accounts, your trading accounts, you just have a different, more bespoke better together experience with TurboTax. So those are the 3 prongs that are giving us confidence in the year ahead.

And because you mentioned AI and this is an AI conference, I'd love to get your thoughts in terms of what you guys are seeing with momentum behind Intuit Assist. Are you starting to see that contribute in a material way, either that be with onboarding new online services, right, or creating more cross-sell? Or is it like any interest, I guess, in add-ons and how you guys are thinking of monetizing it? Do you just mind giving us an update there and what you're seeing?

Yes. Really exciting. You asked a lot on the revenue side. Let me address both on the revenue side and the margin side because there's a lot of things to be excited about on both sides. On the revenue side, we see a 3-pronged approach to monetizing AI. First is that we believe AI will drive better conversion retention and adoption of our offerings. What we saw is in Global Business Solutions Group, QuickBooks, that with AI onboarding, we saw 9 points higher completion of the onboarding flow. That results in better conversion, better retention on our platform. We saw in QuickBooks that when we use AI to deliver just the right offer to you in product discovery, we saw 10% better adoption of you signing up for that offer. That drives better adoption of our platform. In TurboTax, we saw about 2% better conversion. Keep in mind the scale of TurboTax, right, in customers converting into completing their tax returns. So these are all areas that gives us confidence on the first prong. The second prong is AI is really good in getting you a lot of confidence. But on our platform, when you're making some key financial decisions, you don't just want a lot of confidence, you want 100% confidence. And we will have seamless unlock by embedding live human experts throughout our platform, from AI to live human expertise on a tax situation, on your marketing situation, on your employee situation. And that is an upsell and monetization opportunity for us. And lastly, Taylor, we see opportunity for us to continue to lean into lineup innovation by where we put the AI SKU. And we did that with Merchant, we saw a mix shift towards higher-end SKU. That improves our pricing power. That also, over time, could lead to AI-only specific SKUs. So those are all areas on the revenue side that's giving us confidence, a lot of excitement about what AI could do. Let me also now touch on the margin side. On the margin side, we saw about 13% reduction in call volumes to our contact centers because 80% of the people were able to get the help, questions addressed within 5 minutes using Intuit Assist without ever talking to a human. We saw our customer service time, which is a key input into the unit cost economics of live expertise go down significantly because if you had a question, historically, it might have taken an expert to go and research it and give you the answer. It might take them 5, 6 minutes. Now it could take 40, 30 seconds. That's a meaningful shift in those unit economics. And we're just seeing better opportunity in terms of efficiencies in marketing, 10% to 30% efficiency in our developer productivity. So these are all things on the margin side from AI that's also giving us confidence. So it's a lot of excitement about AI, and that should be paying dividends in the years ahead.

Yes. I appreciate all the color, lots of excitement. I know earlier you mentioned you've been getting a lot of investor questions on the promotional activity. So I have 2 right here to throw at you in the last like couple of minutes that we have, but the first one is just on the promotional activity being pushed out. What makes you confident that there will be demand drivers as well at this point in time?

In the January to February time frame?

I would imagine.

Yes, okay. So what we saw is -- and keep in mind, it's not just our data that we have, but also the retailers' data, our partners' data. And we saw the buying behavior of these customers, promotional period as well as non-promotional period and how they engage with other offerings. That gives us confidence that making that change is going to be more helpful. The W-2s, the 1099s that start showing up in January time frame in the mail boxes, people get that. They're like, "Oh, I've got to figure out how to get my taxes done. " And that just is a natural catalyst for them to go think about it. And if you have something on promotion, you should get more share. So that is what's giving us the confidence that it's simply a revenue shift and nothing beyond that and should -- could even possibly be a better ROI on that promotional activity.

Perfect. And then the last one, still on the promotional activity is a question on why now. Why not do this in prior years? And was there any weaker demand signals that you guys might have been seeing that led to that?

Nothing on the weaker demand signals. Why now is, for example, the learning that 30% of people in the assisted tax category make the decision who to use before December. We weren't in the assisted tax category before. These are just learnings as a business, having the growth mindset, saying where are the opportunities for me to just get better ROI on my spend continuously and a set of continuous improvement is in that breadth that we saw this and nothing to do with the demand environment. It's only because we thought the ROI would be better and all internal indications as those partner indications give us the utmost confidence that ROI will be better.

Perfect. So with that, we're just at time. So thank you, everyone, in the audience for attending. And Sandeep, thank you so much. Let's give him a round of applause.

Thank you, Taylor. Thank you all.