Good afternoon. My name is Saiid, and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit's Second Quarter Fiscal 2014 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.
With that, now I will turn the call over to Matt Rhodes, Intuit's Director of Investor Relations. Mr. Rhodes, you may begin.
Thank you, sir. Good afternoon, everyone, and welcome to Intuit's Q2 fiscal 2014 conference call. I'm here with Brad Smith, our President and CEO Neil Williams, our CFO and Scott Cook, our Founder. Before we start, I'd like to remind everyone that our remarks will include forward looking statements. There are a number of factors that could cause Intuit's results to differ materially from our expectations.
You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10 ks for fiscal 2013 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward looking statement. Some of the numbers in this report are presented on a non GAAP basis. We've reconciled the comparable GAAP and non GAAP numbers in today's press release.
Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period and the business metrics and associated growth rates refer to worldwide business metrics. As a reminder, all reported results exclude Intuit Financial Services and Intuit Health, which have been sold and reclassified to discontinued operations. A copy of our prepared remarks and supplemental financial information will be available on our site after this call ends. And with that, I'll turn the call over to Brad Smith.
All right. Thanks, Matt. And thanks to all of you for joining us. Today, we reported 2nd quarter revenue of $782,000,000 down 12% from last year. Now this reflects the shift of tax revenue into the Q3.
As a result, we raised our Q3 guidance and we reaffirmed our guidance for fiscal 2014. Before I drill into the details, let me begin by talking more broadly about a secular theme, a theme that is driving growth across all of our businesses, the adoption of connected services with favorable lifetime value economics and predictable recurring revenue streams. The move to the cloud powers our connected services strategy. It enables us to deliver awesome product experiences that allows us to leverage the contributions of others and it gives us the opportunity to capitalize on the data to create real customer delight. With our restructuring efforts that we executed this past summer, our teams are laser focused and aligned against 2 strategic outcomes: 1st, to be the operating system behind small business success and second, to do the nation's taxes in the U.
S. And Canada. We're successfully leading this platform to shift to the cloud with our goal of adding 5,000,000 small business customers and 20,000,000 more tax filers over the next 5 years. We've made progress against these strategic goals since declaring them 6 months ago. Beginning with small business, our cloud solutions continue to build momentum.
QuickBooks Online subscribers grew 30% in the 2nd quarter, accelerating versus last quarter. We added 45,000 net new customers in this past quarter alone. We're also seeing strong growth in QuickBooks Online outside the United States, where we have 46,000 subscribers nearly double last year's base and accelerating from 80% growth last quarter. In parallel, we are early in the migration of our existing base of QuickBooks Online customers. Once customers are on the new version, the leading indicators are really promising with attach rates of payments and payroll much improved versus the classic QuickBooks Online.
And when you add in QuickBooks Desktop customers who have elected to pay us a recurring subscription fee, our total subscriber growth is now up 26%. Now moving beyond QuickBooks, demand for subscribers also grew 33% and Intuit's online payroll subscribers grew 20%. On the marketing front, we've launched a new small business campaign that showcases the ease and versatility of the new QuickBooks Online and the supporting ecosystem of services. And all of this is occurring with the halo effect of our Small Business Big Game campaign, which was the biggest social program in our history. This campaign significantly raised into its profile, generating more than 11,000,000,000 impressions in 7 months.
We also made a small business' dream come true. We put GoldieBlox, a 15 employee toy company from Oakland, California in front of the world with a commercial during the big game. Wrapping up our small business performance, we are powering through several proactive decisions as we aggressively position ourselves for the future. We're leaning into the new QuickBooks Online and as a result, the expected decline in QuickBooks Desktop units will continue as we create greater incentives and migration support to move these customers to a cloud based solution. We've also shifted our strategic focus in payments to QuickBooks merchants and this is in support of our ecosystem approach.
We've simplified our pricing model to ensure that we're delivering a superior value for the price and our revenue this quarter reflects this increased focus on our small business ecosystem. Neil will cover more of these details in a minute. But even with these transitional moves, our small business online ecosystem continues to build momentum and we expect to deliver double digit revenue growth in small business overall this year. Now let me move to tax. As we shared at the beginning of the fiscal year, the current season is our first step in a multiyear journey to redefine the tax preparation paradigm and to radically simplify the tax prep experience.
In particular, we remain focused on improving our share of the 70,000,000 consumers who file simple returns in the U. S. And Canada, many of whom are simply paying too much for their tax preparation. Let me share a few of the examples of product innovations that we already have in market this year for the individuals who are filing simple returns. For the first time, our free federal product transfers returning customers personal information and their prior year tax data.
This includes W-two wage and salary information from their employer and it drastically reduces the time it takes to complete a tax return. We've also executed targeted pricing actions in key time windows when these more simple filers will do the returns and complemented our free federal product with a state product at $15 SNAP PACS, our mobile tax offering is a favorite amongst these simple filers and it's now available in both Spanish and English and it includes an all in price of $15 as well. Now for the broader tax base, we redesigned the online experience for our returning customers. We now offer a more personalized experience that adapts itself to a customer's unique tax situation and eliminate all unnecessary questions. The redesign highlights year over year changes to a customer's tax refund and provides easy to understand explanations for why the refund increased or decreased.
These explanations not only eliminate any unnecessary confusion, they reduce the number of customer care calls. These product improvements are occurring within the context of a shift in our marketing efforts as well. While we're investing less in marketing year over year, we are approaching our programs with bolder execution and clearer positioning as the champion for the do it yourself tax filer. We received very positive reaction to our new ad campaign. It's amazing what you're capable of, which clearly demonstrates how TurboTax empowers people to take on their taxes with confidence and ease.
So what does all this add up to? Well, it's very early in the season, but we're seeing good trends. We're seeing good trends in traffic, in conversion and in net promoter scores. And as we shared in our separate TurboTax release today, our units grew 7% through February 15 versus the comparable prior year period. Now realize what's in everybody's mind is, well, who's winning?
Well, hot off the press, the public data from the IRS that was released today and reports the data through February 14 shows that the total self prepared e files are up 6.6%, which is a pretty decent proxy for the do it yourself software category. Now on a comparable basis through February 14, TurboTaxi files were up 10%, which indicates we've gained some share. As a reminder, our next unit update will be at the end of April. Now on the ProTax side of the business, we've also seen strong early results in customer acquisition. E files for our new Intuit tax online product have increased more than 40% year to date.
We expect about 7% of our ProTax customers will use our cloud based solution over the course of this tax season. So I want to put a bow around our progress in the first half of the year. We're moving faster in the U. S. And globally, but we still have work to do.
Our small business subscriber growth is accelerating and it's driving double digit revenue growth this year and beyond. And while it's still early in the tax year, I am really inspired by our team's work to reimagine the tax prep experience for both consumers and professional tax preparers. You'll see a lot more innovation from these teams over the coming months years. And with that, I want to turn it over to Neil to
walk you through the financial details. Thanks, Brad. Let's start with overall company results.
For the Q2 of fiscal 2014, we delivered revenue of $782,000,000 non GAAP operating income of $17,000,000 GAAP operating loss of $46,000,000 non GAAP diluted earnings per share of $0.02 and a GAAP loss per share of $0.13 Turning to the business segments. Total Small Business Group revenue grew 8% in the 2nd quarter. Small Business Financial Solutions revenue grew 5%. QuickBooks revenue grew 12%, while payments revenue was flat. Customer acquisition in our online ecosystem continues to drive growth.
QuickBooks online subscribers grew 30%, accelerating from the Q1. QuickBooks desktop subscribers grew 19%. QuickBooks enterprise subscribers grew 20%. QuickBooks Desktop units declined 9% versus last year. And as Brad mentioned, we expect desktop units to decline and revenue growth from the desktop ecosystem to slow as we continue to improve and emphasize QuickBooks Online.
The good news here is that the lifetime value of QuickBooks Online customers is 40% higher than desktop. Total paying QuickBooks customers were up 15% for the quarter driven by the shift from desktop units to subscriptions. Payments revenue was flat versus the year ago quarter. Brad described some of the strategic decisions we've made in payments. Let me walk you through the numbers.
As you can see on the fact sheet, merchants grew 7% and card transaction volume grew 3%. One click down, our core QuickBooks payment business is growing and certain non core channels are declining. The numbers reflect the impact of strategic decisions we've made to drive customer growth. For example, over the past few years, our payments pricing structure has become less competitive. We've rolled out a simplified pricing plan that lets customers choose between a pay as you go option with a clear rate per transaction or a plan with monthly fee and a lower discount rate.
While we give up some near term revenue because we have fewer merchants on plans with monthly fees, we believe more merchants and higher overall volume will more than make up for that over time. And we'll still have to grow over the non strategic business lines. These represent about 10% of the payments business revenue. And in the Q2 this non strategic revenue declined about 25%. In Small Business Management Solutions, revenue grew 16%.
Employee Management Solutions revenue grew 14% driven by strong growth in online customers as well as our assisted and full service offerings. Demandforce revenue grew 32%. One last point on small business. Our guidance remains 10% to 12% revenue growth for the year. This growth is coming more from customers and mix improvement this year and less from price.
Price drove about 5 points of growth last year and will only drive about 2 points this year. That's a much healthier mix and bodes well for continued customer growth as we move forward. Brad covered the tax update and the numbers are in the press release. Let me just remind you that the consumer tax comparisons get a bit tougher in the back half of the year and our strategy this season is built to drive customer growth and share gains. This means customers may grow a point or 2 faster than revenue, which we think is a very healthy sign for the business long term.
Moving to our financial principles and capital allocation. We continue to take a disciplined approach to capital management, investing in cash we generate and opportunities that yield 15 plus percent ROI. Our first priority is investing for growth in the business. So far this fiscal year, we've made 5 small acquisitions with a total investment of around $125,000,000 When is the best use of capital? We'll return cash to shareholders via share repurchases.
We completed the repurchase of 1,400,000,000 of shares so far this fiscal year and we have about $2,000,000,000 remaining on our authorization. As we've mentioned, we expect to reduce our share count 4% to 6% net in fiscal 2014 and we intend to be in the market every quarter. Our Board approved a $0.19 dividend for fiscal Q3 payable on April 18. We reiterated our guidance for fiscal 2014 and provided updated details on quarterly guidance to reflect the expected shift in tax revenue we mentioned in our press release. And with that, I'll turn it back to Brad to close.
All right. Thanks, Neil. So we've talked a lot about our strong small business results and our multiyear efforts to reimagine tax prep. Our aspirations to become the operating system behind small business success and to do the nation's taxes are bold, strategic objectives. And I'll tell you that I have confidence in our ability to achieve these multiyear goals because of our company's commitment to creating an environment where the most talented employees can do the best work of their lives.
It takes effort and investment to create a culture that operates like a It takes effort and investment to create a culture that operates like a 30 year old startup and we continue to make advances each and every day. This commitment not only shows up in the kinds of products that we're delivering for our customers, but it's acknowledged in the war for top talent where Intuit has been ranked for the 13th year in a row on Fortune Magazine's 100 Best Companies to Work For list. This year, we broke into the top 10 at number 8, our highest ranking ever. We have lots of opportunity in front of us and we remain deeply committed to accelerating customer and revenue growth, but it all starts with great people and I could not be more proud of the Intuit team. With that, let's open it up to you to hear what's on your mind.
Thank you.
And our first question comes from Brent Mill from UBS. Your line is open. Please go ahead.
Good afternoon. Brett, if you could just touch on online on the tax side and maybe give us a little more color what you're seeing so far this year? And also, if you could just bring us up the speed on QuickBooks outside the U. S. I know you had a really good growth rate.
Can you give us a sense of what your priorities are this year in that business? Thanks.
Yes, sure can Brent. Thanks for the questions. First of all, in tax online, we are very encouraged by the early results. As you know, there are 2 peak periods in tax season. That first period is around end of January, early February when people get their W-2s and then the last peak is April 14 15.
Coming through that first peak, we are growing faster than the category and faster than the market overall. And with 11% unit growth in TurboTax Online, we're very encouraged with the results we're seeing. Now we mentioned this is the 1st year of a multi year journey. We're making big changes to the product. We're changing our approach to marketing and we're improving our customer care experience and the team continues to innovate every week.
So we expect to continue to learn and adjust as we go. But so far what we see happening now is that our performance in the market is not only helping customers get a better experience, it's helping us grow faster than the market at least through the first half of the season. Now I'll move to the QuickBooks question and talk about QuickBooks Online outside the U. S. We currently have 46,000 paying subscribers outside the United States.
That is basically double where we were last year and we continue to see strong momentum as we're adding feature functionality in respective countries. Now as you may remember, we're focused on 4 countries primarily right now. That's Canada, the UK, Australia and India. And in each of those 4 countries, we continue to sign strategic partnerships with 3rd party developers who help us round out our portfolio of features. And in other areas we're actually introducing features that we're building ourselves.
And so we're continuing to pick up momentum and we anticipate that we will start to look at other countries beyond these four and it will all be enabled by one thing that separates us from our competition. We have the 1st truly global ready platform that can be localized by a 3rd party and an end user in any country in which customers want to use the product. We now have paying customers in over 190 countries. So while we're focused on 4, we are seeing adoption in other countries and that's helping us choose where we're going to double down in terms of the next countries we go after. So that's really the headline on the global QuickBooks Online momentum.
Thank you.
You're welcome.
Thank you. And our next question comes from Gil Loria from Wedbush Securities.
Thank you for taking my question. So it sounds like a part of the inflection point in QuickBooks Online is that you're now going out to your desktop customers, existing customers and having them switch. Can you talk a little bit about how that's been going so far? Are you getting good conversion rates in terms of getting the customers to convert? Is the process going as smoothly as you wanted?
Is this something you're going to continue to push?
Yes, Gil. So we are very early in the journey. It is now available to all QuickBooks Desktop and QuickBooks Online customers. We currently have about 12% of the QuickBooks Online base that has moved over to the new QuickBooks Online. So it's really still pretty early.
But the results are getting are very positive. We're getting great feedback. The net promoter scores are higher. And from our perspective, the benefit is it reduces the friction between additional services. So I'll give you a couple of data points.
The attach rate for payments to QuickBooks Online is 50% higher in the new version of QuickBooks Online than it was the classic version. The payments attach rate is also higher up about 6%. And so when you put those things together, you're seeing a better product experience with also the addition to sell additional services and that's a big win for the customer and it's a big win for us.
That's great. Thank you. You're welcome.
Thank you. And our next question comes from Walter Pritchard from Citigroup. Your line is open. Please go ahead.
Brad, I'm wondering just expanding on that last question. I'm wondering if you could talk about what measures you might take to sort of lean in harder to that transition and potentially drive the base towards online more aggressively than we are today and how you're thinking about potentially making that choice?
Yes, I'll be happy to do that, Walter. It really falls into 3 buckets. 1st and foremost is we want to make sure that the feature functionality in QuickBooks Online is the features the customer is currently using in desktop if they're moving from desktop. And so we've been working on our online banking feeds and reconciliation capabilities and we're also strengthening inventory for those companies that are product based businesses. Beyond that, we want to make sure that it's a seamless, frictionless migration.
And so we've got a 3 step, 3 minute conversion program that will move your data out of the prior version of QuickBooks and into the new QuickBooks Online. And we're also backing that up with incentives, creating an economic incentive for you to move into the new QuickBooks Online and get used to the new look and feel. And then over time, we're seeing that those net promoter scores really tend to accelerate for those customers. In terms of incentives internally, the general manager for the QuickBooks Desktop business has one goal and that goal is to incentivize the customers to move to a subscription based version of desktop or to move to the new QuickBooks Online. And so we've got the entire organization motivated to help desktop units and the increase of our cloud based units.
And Neil, just a follow-up on that. Do you see any quantifiable headwind in terms of the small business growth rate in your fiscal year to this fiscal year as you look towards next fiscal year as a result of pushing harder here?
Not really Walter. I think that you're seeing some headwind this year and last year. And I think you've seen that reflected as the one off sales of QuickBooks Desktop units decline. So I think we've been monitoring that as we go through. If we get the customer growth accelerated and the customer counts up, I'm not overly concerned about what happens to revenue in a period to period basis.
I think you'll be able to see that with much better transparency and predictability as we move these customers to subscription based offerings.
Great. Thanks.
Thank you. And our next question comes from Kartik Mehta from Northcoast. Your line is open. Please go ahead.
Hi, Brad. I just wanted to ask your thoughts on what this new promo for the state version of tax return is doing in terms of drawing customers? Are you seeing new customers come in? And I guess what has been so far the early read on that?
Yes. Thanks, Kartik. Let me first put it into some context. So when we entered this year, we said it was going to be the 1st year of a multiyear journey to make the product drop dead simple and try to eliminate 7,000,000,000 hours of tax preparation drudgery that this country goes through every year, whether it's for a professional to be able to just review a return or for a consumer to basically ask as few questions as possible and get their return done. And so we're making very strong strides in the 1st year of that multi year effort.
Our teams improved the product. We have the best free federal product we've ever had and now it includes that prior year import of information and the ability to import your W-two, so you have very few questions to answer. And we also said we wanted to focus this year's efforts on the 70,000,000 people who have relatively simple returns. Now as we've looked at it, we see that some of these people tend to fall earlier in the season and they also tend to be price sensitive. And so we've tested things in addition to the great product experience we've created, which is not easy to copy.
We've also tested what is the right price value proposition to go out and win those customers. And you saw some of that during the late January, early February timeframe. The results have been very encouraging for us. The fact that we're growing our units 11% online, the fact that our total e file units in a comparable period to the IRS is up faster than the category suggests that not only is it doing the things we wanted it to do, it's also producing the kinds of outcomes for customers. The traffic's up, the conversion's up and the net promoter scores are up year over year for the customer experience as well.
So while we still have a lot of season left to play, we get to play, we like the results we got out of this program in the first half.
So Brad, would you say incrementally are you seeing a lot more new customers because of this new
strategy? The answer to that question is yes. We are getting more new customers into the franchise. We also see as we look at our sources of customers, we're getting more customers from other software players. So we continue to take from tax stores, but we're getting a higher proportion of first time filers and we're also getting more customers from other software providers.
And then just one clarification on the fact sheet, when you put out QuickBooks online subscribers, would those be would those include trial as well as paid or is it all paid and no trial?
It's all paid, no trial.
All right. Thanks, Brad. Appreciate it.
You're welcome, Kartik. Thank you.
And our next question comes from Scott Schneeberger from Oppenheimer. Your line is open. Please go ahead.
Hi, Brad. It's Josh with Cyber on for Scott. With TurboTax e filings up more than the IRS e filings, would you infer that you're taking market share from other channels or pulling forward within the DIY channel?
Josh, right now with the data we have, we believe that we are taking share early in the season, but we also recognize that as the rest of the season plays out, there's a whole lot of time left on the clock. And so we're going to have to remain focused and aggressive and continue to push new product innovation and different kinds of focused marketing efforts to the back half. But we don't think that this is a pull forward. In fact, what we see is a whole bunch of people still yet to file. That procrastination trend continues year over year.
And so for the people who have filed so far, we think we've got a disproportionate share relative to the category.
Okay. And would you be able to break out the TurboTax volume and e files between U. S. And Canada?
I'm looking at math to see if we produce that on the fact sheet here. So give me one second.
It's on the fact sheet, but only
through the 31st January. So let me follow-up with you after the call on that. Okay. Thank you. And then just one more if you don't mind.
How are you guys comparing year over year for refund transfers and also for mobile filings?
I can talk to the mobile filings. So far, we're actually seeing an increase of almost 3x over this time last year in terms of people that are logging in through either a tablet or a phone to not only start the tax return but complete it. Now last year a total of 5,000,000 people for the entire season went in and did their taxes on started on a mobile device and then completed their taxes. But we're seeing a significant increase this year of people coming in and using the phone or a tablet to do their taxes. In terms of the refund transfer, I'm just going to look at Neil or Matt to see if we've got any information we've shared at this point.
We really
haven't shared any information on that Brad and probably rather not get into that Josh at this time.
Okay.
I appreciate you taking my questions.
All right. Thank you, Josh.
Thank you. Our next question comes from Ross MacMillan from Jefferies. Your line is open. Please go ahead.
Thanks a lot. Maybe first on tax, Brad. The comment you made about more volume this year relative to price and that revenue could be slightly lower than volume. Is that relating primarily to what you're doing with free federal with state and the sort of lower price on state for that product? Or is it a broader mix shift across the product portfolio and if so what's driving that?
Thanks.
Yes, Ross. So I'll go back at what we've tried to articulate over the last few years is our preferred method of growing a healthy tax business is to expand the DIY category to get more people into doing the taxes with software and then to take a disproportionate share of that category, so to continue to grow TurboTax share. To do that, we've always said the healthiest indicator of a strong business is to grow units faster than revenue. Because if we do that, we're getting customers in and we know over the lifetime of their taxes, they start to get more complicated, they move up the product line and we're able to increase the revenue per return over multiple years. And so our goal going into this year was exactly the same goal as it has been for the last several, which is let's grow our units faster than our revenue.
And we think with the new product innovation we have this year and in particular we have a great free federal product, but we also have a new experience for returning TurboTax customers and for also paid simplifilers. And it's a combination of all of those that we believe are contributing to growing our units at the pace that we are right now. And we would be very happy if we end up this year with our units growing several points faster than our revenue.
Thanks for the clarification. Maybe one follow-up. Great performance on QuickBooks Online subscriber adds, that's a really nice acceleration. Neil commented that the uplift in lifetime value is about 40%. From my recollection, I thought the number was a bit higher than that.
I wonder if you could frame that 40% for us. Is it just looking at a particular cohort of customers? Or is there some other dynamic as you think about that value uplift per customer? Thanks.
Ross, it primarily comes from the selling price of QuickBooks Online as well as the ease of attach that Brad mentioned earlier. So those are the 2 drivers. It's a little bit more than 40%, but it's close.
Ross, I'll add one thing. I added a couple of these anecdotes a few minutes ago around the new version of QuickBooks Online, which we return in we refer to it inside as Harmony. The neat thing about the leading indicators on the new QuickBooks Online is the people who go from trial to a paid subscription. When they move to the new version, that's actually a 6% lift in trial to sub. That's a pretty big conversion improvement.
Then when you look at the attach rates, the people who are actually attaching our merchant services, our payments business, that's up 50% versus the old QuickBooks Online and the payroll number is actually up a little over 5%. So not only do you get a higher selling price, as Neil said, we're getting a better traffic to a paid subscription conversion and we're getting higher attach rates. And so all those lead to the higher lifetime value.
Very helpful. Thanks a lot. Congrats. You're welcome. Thank you.
Thank you. Our next question comes from Brad Zelnick from Macquarie. Your line is open. Please go ahead.
Thanks for taking my question. Brad, on consumer tax, you've talked about the opportunities to drive better conversion. And I was hoping you could just talk a little bit about season to date, how you're doing in this regard? And specifically, can you also comment on CPA Select and the traction that you're seeing there in helping to convert prospects that might otherwise drop out and head to a tax store?
Yes, I can Brad. I'll start first on TurboTax Online and conversion. So as you know, we have not had a traffic problem with TurboTax Online. In fact, we get about 1 half of all America coming into TurboTax Online through a tax season. And so that's a significant amount of traffic.
We just haven't always converted that traffic into paid users. This year with the changes the team has made not only to the website but more importantly to the product experiences, we are getting a higher conversion rate on our traffic right now. And so that's been positive news for us. In addition to that, we're continuing to release new innovative versions of the product every week. So the team hasn't gone into code free.
They continue to innovate. They learn. They run AB tests and they're continuing to optimize conversion. And we're seeing higher net promoter scores. Right now, it's 4 to 6 points higher than it was last year for our online version of our product and that's a pretty significant improvement year over year.
So I'm proud of what the team is doing. At the same time, we're constructively dissatisfied and there's still a lot of time left in the season. We're going to continue to innovate in the product. In terms of CPA Select, the TurboTax team is working with our sister division in ProTax. This year we are in a full live beta of this test.
We have 550 CPAs and currently the customers that start out in TurboTax and end up going to one of those CPAs to finish their return have a net promoter score that is 25 points higher than simply the pro category overall. And so while it's just in beta and I want to manage expectations, we like the early results of this experiment. And if we continue to see these results, we'll continue to lean into this as we look forward to next year.
That's very helpful, Brad. And if I can ask one quick one of Neil. Neil, just following Walter's question and some of the other questions about leaning in to QuickBooks Online and migrating the desktop base, can you maybe share the mix of online versus desktop that's embedded in your full year guidance?
We still assume that in 2014 roughly half of all new customers would go to QuickBooks Online, half to desktop. That's a big shift from maybe 3 or 4 years ago where maybe we're looking 5% to 10% of new customers came into QuickBooks Online. This year it's about half half.
Thank you very much.
Thank you. And our next question comes from Jim MacDonald from First Analysis. Your line is open. Please go ahead.
Yes. Hi, Brad and Neil. On the total overall filers for tax season this year, what are your expectations? I noticed they were up early, but maybe down in the data today.
Yes, Jim, we're still pegging somewhere between 0% and 1%. I think you've probably at this point had the chance to see some of the data we saw that last year there was a little bit of a recovery and the total IRS filings ended up being down about 0.1%. So it was relatively flat. The hypothesis we all had in the industry seems to have been validated by the IRS Commissioner who just testified in February in front of Congress or the House Ways and Means Subcommittee that the IRS continues to get better at catching fraudulent returns. And last year they stopped and rejected about 6,700,000 returns and that was up from 5,000,000 in the prior year and 3,000,000 in 2011.
So I think what you're seeing right now and what our expectations are is the total number of people filing will probably go somewhere between flat to up about 1% and that's what we built into our guidance.
Great. And just a follow-up. So did the final revenue shift, I know you just preannounced last week, but was that still the $120,000,000 you talked about last week?
It was. Okay. Thanks very much. You're welcome.
Thank you. Our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.
Yes. Thanks. Hi, guys. In terms of in the consumer tax, the pricing that you're using to expand the category, are you able to quantify that? In other words, are you able to prove that you are expanding the category and bringing in more of those simple filers versus just simply stealing market share from other software providers in what might be considered a price?
Yes. Sterling, I lost you on the back half, but I think I got the question which is, are you able to show you're expanding the category versus simply stealing share and what could be I think a price war is what you were suggesting or a price you may want to take the last part?
Yes. So just make sure that you're expanding the category and capturing a bigger sales category versus just making this a price competition.
I got it. Thank you. Well, 1st and foremost, the way anyone's going to win in this category is not price because the lowest price in the category is free and everyone has a free version out there already. The way you win in this category is to give somebody the simplest experience and getting them the maximum refund. And that's where our 1st year of a multiyear effort is to completely reimagine how we do that and to set the standard for everyone in the industry.
And so that's where our focus is. The second is there's been some emphasis in this particular call on the low end of our product lineup. If you take a look at it, we actually took a hard step back this past year and said we need to make sure we get the right customers and the right product. And so we made changes to all of our product line. We removed some of the forms you used to be able to do in the middle part of the product line and we moved it up to the higher tier because that's really the right product for the customer.
And so we're seeing mix where some customers are moving from the middle of the product up to the premier line and we're also getting a better free product out in the marketplace to basically win and grow the category there as well. The only thing I can give you to answer your question today is the data that's been published by the IRS because no one else has reported. And what they would suggest is that the do it yourself category is up 6.6% and the assisted and pro category is down 5.4%. So if you put that together with the programs we have in place that suggests the category is growing and is taking share from the alternative methods.
Got it. No, that's great. And then in terms of on the small business side, you talked about maintaining the double digit outlook for the full year. Does that mean that we should see a bounce back in the growth rate starting next quarter? Or is it going to be even more back end loaded in terms of how we get to that 10% to 12%?
Hey, Sterling. This is Neil. And really the only thing that was off of the double digit growth in Q2 was payments. The comps get a lot easier for payments in the back half of the year and we expect the benefits of simplified pricing and more customers on new QuickBooks Online to bring our active use back up. So, yes, we think the comps get a little easier in the back half.
All right. Great. Thank you, guys.
Thank you. Our next question comes from Jennifer Lowe from Morgan Stanley. Your line is open. Please go ahead.
Great. Thank you. Maybe just to make sure I'm clear on that last point. On the payment side, I guess the first question is, when we initially got the 10% to 12% guidance, was the negative impact in payments kind of contemplated in that guidance or was that something different than what you'd expected? And then just parsing through the response to the last question, is the expectation that the payments business will return to a more normalized growth level in the back half of the year?
Or do we need to see acceleration in some of the other business lines to get to the 10% to 12% SMB guidance for the year?
Yes. Thanks, Jennifer. I would tell you the softness in Q2 is probably a little bit more than we had anticipated in Payments when we originally set guidance. But on the other hand, some of the other components of the category have performed better than we thought. So that's why we're reaffirming guidance and we feel pretty good about it.
In the payments category specifically, it's going to take us a bit to grow over some of these non strategic components of the portfolio. I could see it getting back to high single digits or mid single digits by the end of the year. It's not going to be a double digit growth this year in my view. But just getting back to those type levels put us solidly in the guidance range we've given for the category overall.
And then just one quick one on tax. I think one of the big discussion points coming into tax season was what impact the earliest leanings of the Affordable Care Act might have on consumer behavior and how they approach tax season. And obviously, you all had the partnership with Ehealth on that front. Has there been anything notable to talk about around how ACA is impacting the tax season you've seen so far?
Jennifer, there has been and I appreciate the question. First and foremost is we're seeing no observed behavior of a customer wanting to switch their tax prep method because of the Affordable Care Act. That was our hypothesis because we looked at what had happened when
Massachusetts had rolled this out years ago and we saw no shift
in behavior to someone moving Massachusetts
had rolled this out years
ago and we saw no shift in behavior to someone moving from one method to another. Our own surveys heading into this tax season suggested that less than 1% of customers said they would actually be inclined to go someplace else because of affordable care. But that didn't eliminate the need for us to be able to make sure that we do for health care what we do for taxes, which is take a very complicated law and make it drop dead simple so you understand the implications to you and we help you take action as a result. So we launched TurboTax Health. We've had over 3,000,000 consumers visited so far this season.
Over 600,000 of them were uninsured and we've helped them understand the implications through a free tool, how affordable care impacts them, whether they qualify for a subsidy or they may potentially have a penalty and we can route those who want health care to the eHealth partnership that we have. And so right now what I can tell you is affordable care has been out there, do it yourself category is growing fast. The assisted category is not growing so far this year. And our results seem to be very healthy. And so we feel like affordable care is something we needed to address and we have, but we don't see it causing any shift in the marketplace.
Great. Thank you.
Thank you. Our next question comes from Michael Millman from Millman Research. Your line is open. Please go ahead.
Thank you. More on tax, considering the big difference between the tax pros and self prepared that the IRS the current IRS numbers, to what extent do you think weather is playing a major part in this? And I guess 2 ways. In 1, possibly at home keeping people at home can't get to the stores. And maybe 2, once they're home, they might decide to do their tax their online tax earlier.
And sort of related to that, to what extent might they decide, we're never going to get out of the snow, let's go to online.
Yes. Thanks, Michael. Spoken like a true man from the Midwest and the Northeast who had to live through some of this. I appreciate it. 1st and foremost, I think that weather is clearly going to have some impact on everyone from retail to someone who may be doing tax store returns.
I would want to step back and put a little bit of context around that though. First, last year without those kind of weather conditions, the do it yourself tax prep category grew 4.6% and the assisted which means going to a store or pro grew 1.2%. And that was the continuation of a 10 year trend. So there is a shift to people wanting to do things online. I think in this particular case, this is the first two reports from the IRS.
There may be a more exacerbated version of that happening because of weather. But the key is if they stay home and file their taxes, they're not going to be following them a 2nd time. So those are customers that we've now got and they won't be
in the mix between now and April 15. And so related to the growth you just mentioned last year, to the assisted people continue to talk about the sixty-forty split, do you have a different measurement?
No. We actually see today that about No. We actually see today that about 60% of people today go to a CPA or they go to a tax store. If you look at that data and then you break it out, it looks like the CPA segment is growing about 1%, 1.5%. The tax stores are relatively flat.
They tend to be fighting among themselves in terms of units from what we can get from their public data. And then the one category that's growing is the do it yourself category, which continues to grow in the 3% to 5% range each and every year. And so right now there is a snapshot in time that says sixty-forty. I think if these trends continue, you're going to see that continue to shift because growing 4 times faster will eventually start to shift the landscape more into
the software category. Since we've had this forty-sixty for some time, it suggests that there's been mostly a shift from paper to electronic. Do you see that as being done
with? Well, I think as you know really well, you follow this
category closely. We're down
to mid single digit number of people filing with paper and pencil and we've been there for the last couple of years. And that didn't slow down the 4x growth rate over the assisted model last year. And if you look at the early results this year, it's growing even faster. So I think even with manual relatively gone out of 140,000,000 people to be down to 5000000 or 6000000 and still be growing 4 times faster, I think that's a misperception. Great.
Thanks, Brad. You're welcome, Mike.
Thank you. And our next question comes from Raimo Lenschow from Barclays. Your line is open. Please go ahead.
Thank you. Two quick questions. First, if you think about the benefit you get from the new QuickBooks Online product and the reacceleration, at the moment, so we went out like 2 quarters ago, it was 28% unit growth, then it was 29%, now it's 30%. How do you have to think about it? Do you think there's going to be a step change or is that kind of a slow progression towards higher numbers?
And what do you think is a number that you can achieve there? That's the first one. And then on Payment, can you just talk me through like what triggered the changes on the pricing? You obviously you've been in the payment business for quite a while. So has there been a change in the competition that you kind of started to look like you were losing share and you needed to make the changes or what was driving it?
Thank you.
You're welcome. So let me start with QuickBooks Online and I appreciate you calling out the quarter over quarter acceleration because that's what we're seeing. We do believe you're going to continue to see an acceleration because we're very early in getting customers over to the new QuickBooks Online. I mentioned a few minutes ago, only 12% of our current QuickBooks Online customers have moved to the new version. Now we haven't put any forecast out there that say what will that number accelerate to.
We've just built that into our overall small business guidance. But I will tell you that we are committed to accelerating the growth of QuickBooks Online in the U. S. And globally and also getting customers off the desktop into this new cloud based version. In terms of payments, Neil mentioned this a few minutes Neil mentioned this a few minutes ago
and I would tell
you that one of the things that we achieved
with the restructuring this past
summer as we put the payments team right next to the QuickBooks team, they're now managed by 1 leader because really customers think about their money in and their money out as one set of activities. And as we sat down and got underneath why customer growth was what it was, we discovered that we had allowed ourselves to lean too heavily on price. In fact, last year about 10 points of our payments growth came from price. What we now realize we needed to do is customers wanted 2 options. They wanted to pay as you go model and they didn't want a monthly fee, they just wanted a per transaction and then we had another group that actually was willing to pay a monthly fee and then have a lower discount rate.
And so by introducing that, we're giving up some short term revenue, but we're actually starting to see an acceleration of people signing up for merchant services. And I'll give you a data point. The merchant the payment services attached to QuickBooks Online is up 37% this quarter. And so by moving it into the new version of QuickBooks Online and by changing the pricing model, we're getting a reacceleration of our merchants and we think over time that will lead to higher volume as well. So what we basically did is we realized that we had leaned too heavily on price and we needed to get back to having a seamless experience with a set of pricing options for the customer.
Perfect. Appreciate the clarity. Thank you. You're welcome. Thank you.
And gentlemen, I'm showing no further questions at this time. Would you like to close with any additional remarks?
Yes, Saiid. Thank you. I want to thank everybody for your questions. I realize there's a lot of moving parts going on out there with the IRS data coming out hot off the press and our announcement a couple of weeks ago to try to help people understand the shift. I'll just put a bow around it by telling you we've come out of the first half of this fiscal year strong.
I like our momentum. I like our plans. I like the fact our teams are continuing to lean in and innovate every week. We still have a lot of time left on the clock, so we're not going to let up and we're looking forward to closing out this year the way we started it. And I'll look forward to speaking with each of you when we see you out on the road in the next couple of weeks or for those that don't see, we'll talk to you next quarter.
Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may all