Good afternoon. My name is Latif, and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit's first quarter 2017 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. With that, I'll now turn the call over to Jerry Natoli, Intuit's Vice President of Finance and Treasurer. Mr. Natoli?
Thanks, Latif. Good afternoon, and welcome to Intuit's first quarter fiscal 2017 conference call. I'm here with Brad Smith, our Chairman and CEO, and Neil Williams, our CFO. 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-K for fiscal 2016, 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 these remarks 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. A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. With that, I'll turn the call over to Brad.
All right. Thank you, Jerry. Good afternoon, everyone, and thanks for joining us. Fiscal 2017 is off to a strong start, and we're building on the momentum that we developed in fiscal 2016. In the first quarter, we grew revenue 9%, exceeded our QuickBooks Online subscriber guidance, and we beat our overall financial targets. With that backdrop, let me begin by sharing a few reflections on our business performance, and I'll start with small business. QuickBooks Online continues to gain traction as we pursue a large global market opportunity. Our goal remains to be the operating system behind small business success, helping small businesses save time and improve their cash flow so that they thrive when times are good, and they remain resilient when times are tough. Total QBO subscribers grew 41% in the quarter to more than 1.6 million subs.
We drove acceleration in our small business markets outside the U.S., where QuickBooks Online grew 50% to 323,000 subscribers, up from 45% in fiscal 2016. The increase came in Canada, the U.K., and Australia, with subscriber growth in the U.K. accelerating to 87%, which was up from 78%. We continue to focus our efforts on improving the product market fit in the remaining countries, which include India, Brazil, and France, and we'll report more on our progress with these efforts in the coming quarters. QuickBooks Self-Employed is also contributing to the acceleration of subscribers. Roughly 110,000 of our QBO subscribers are using QuickBooks Self-Employed. This is compared to 85,000 last quarter and 35,000 a year ago. We've now launched QuickBooks Self-Employed in the U.K. and in Australia as well.
I'm encouraged by the start in our small business group, I also expect our momentum to continue accelerating in the second half as we drive towards our QBO subscriber target of two to 2.2 million subs for the full fiscal year. I'm confident in this acceleration because of the innovations that we have coming to market, including improvements in the core QBO platform that simplify the first-use experience, including enabling small businesses to generate their first profit and loss statement in less than five minutes. We've also introduced a new smart invoicing capability that allows for real-time tracking of the invoice status in both QuickBooks Online and QuickBooks Self-Employed. We've also enhanced the QuickBooks Self-Employed user experience with the ability to now receive payments on mobile devices and always-on mileage tracking. Finally, our recently introduced partnership with Google enabled a seamless integration between QuickBooks Online and Google Calendar.
Based on the strong product market fit that we have with Canada, the U.K., and Australia, we're leaning into greater go-to-market activities behind QBO in these countries. It's these factors that support our confidence in the continued acceleration of QBO subscribers in the back half of the fiscal year. With that overview on small business, let's talk tax. We're gearing up for another exciting tax season in TurboTax by continuing our multi-year investment in product innovation. Those product innovations are focused on reimagining the tax preparation process while driving customer growth and increasing market share. We also continue to promote a set of best practices and standards within the industry that enable the IRS and the states to improve the ability to combat tax fraud. In ProConnect, we're focused on serving multi-service accountants to do both books and taxes for their customers.
Our goal is to be the operating system behind the accountant success as well. In service to this goal, we're providing one location within QuickBooks Online for accountants, where the accountant can access all of their workflows. Several exciting innovations are underway to begin to leverage the capabilities that we've developed in TurboTax within our accountants offerings, including increasing the number of documents that can be automatically uploaded, which reduces data entry. We expect these innovations to help us further strengthen our accountant relationships by helping drive QuickBooks growth over time. Across the board, we're off to a strong start in all of our businesses. With that, let me turn it over to Neil to walk you through the financials.
Thanks, Brad, and good afternoon, everyone. For the first quarter of fiscal 2017, we delivered revenue of $778 million, up 9%, GAAP operating loss of $61 million, non-GAAP operating income of $32 million, a GAAP loss per share of $0.12, and non-GAAP diluted earnings per share of $0.06. Note that our GAAP earnings per share includes the impact of the early adoption of the new accounting standard update for share-based compensation. This update requires excess tax benefits realized upon the settlement of a share-based compensation award to flow through the earnings statement instead of the balance sheet. We expect this accounting change to reduce our GAAP tax rate from approximately 34% to approximately 32% for full fiscal 2017. The impact on GAAP earnings per share is an increase of approximately $0.07 in the first quarter and $0.12 for the full year.
Turning to the business segments, total small business revenue grew 11% for the quarter. As Brad mentioned, QuickBooks Online subscriber growth remained strong, and we exceeded our guidance for the quarter, reaching 1,638,000 subs, up 41% year-over-year. Small business online ecosystem revenue grew 26% for the quarter. As we discussed at Investor Day, we're focused on driving customer growth first, followed by online ecosystem revenue. We expect online ecosystem revenue to grow 25%-30% this year, accelerating as the year progresses. QuickBooks Desktop remains a resilient and important part of our business. The first quarter was exceptionally strong for desktop units, up 23%, as unusually high renewals from existing desktop customers were driven by operating system upgrades. Our plan does not assume this growth continues throughout the year. Desktop ecosystem revenue grew 6% in the quarter.
Moving to tax, consumer tax revenue for Q1 was $60 million, and ProConnect revenue was $112 million. This was in line with our expectations in a seasonally light quarter. To help with your modeling, we expect second quarter consumer tax revenue to grow about a point faster than last year, given the way the calendar falls in January 2017. As a reminder, we expect to provide a tax unit update in late February, concurrent with our second quarter earnings release. We'll also provide a final unit update in late April after the tax season ends. We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield a return on investment greater than 15% over five years. We ended the quarter with approximately $600 million in cash and investments on our balance sheet.
Our first priority for the use of that cash is investing for customer growth. When it's the best use of cash, we'll return cash to shareholders via share repurchase and dividends. We repurchased 1.8 million shares in the first quarter for $192 million, and $2.2 billion remains on our authorization. The board also approved a dividend of $0.34 per share, payable January 18, 2017. You can find our fiscal 2017 Q2 guidance details in our press release and on our fact sheet. We reaffirmed our full-year guidance, with the one exception being higher GAAP earnings per share guidance due to the early adoption of the accounting standard update mentioned earlier. With that, I'll turn it back to Brad to close.
All right. Thank you, Neil. I have to say, I'm pleased with the strong start to the fiscal year, I remain optimistic about the path we're on to grow our QuickBooks Online franchise here in the U.S., as well as in prioritized markets around the globe. We're building on our QBO momentum in Canada, the U.K. and Australia, and we've further expanded the category with relevant offerings like QuickBooks Self-Employed. Our third annual QuickBooks Connect conference in late October was a great success, with attendance up year-over-year, which reinforced the power of the ecosystem that is creating these indispensable connections between small businesses, accountants, and developers. In a headline, we like how we've come out of the gates in Q1, we remain focused on delivering another great year. With that, Latif, let's open it up and hear what's on everyone's mind.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Our first question comes from the line of Brent Thill of UBS. Your line is open.
Thanks. Good afternoon. Brad, on the small business segment, the operating margin was flat year-over-year. You obviously grew it in 2015-2016, pretty nice margin improvement. I know you don't give a lot of guidance specifically to that business, but there's been some concern as you go international, that you can't maintain that operating margin expansion. Can you just walk through how you think about the segment business for small business on margins for the rest of the year.
Yeah, Brent. Sure can. First of all, as we look at the company overall, you know our financial principles are to grow the top line double digits, to grow revenue faster than expense, which gives us operating margin expansion, that produces strong cash flow. Then we invest that cash flow to grow the franchise, either it's through internal investments, it's acquisitions, or it's returning cash to shareholders. Ultimately, as we look at the businesses, both tax businesses, we like to see those business margins north of 60%. In small business, given we're in an expansion mode, investing in growing category, expanding into new geographies, we like to have that in the neighborhood of 40%. I wouldn't get too caught up in the first quarter. We had some things that we moved around last year.
We had our QuickBooks Connect conference that fell in the second quarter last year. This year, it fell in the first quarter. That brought a little bit of the marketing spend forward. Right now, we actually feel good about the overall investments that we're making and our ability to deliver the kinds of margins that we typically talk to you about.
Thank you.
Thank you.
Thank you. Our next question comes from Walter Pritchard of Citi. Your line is open.
Hi. Thanks. I'm wondering if, Brad, you could help us understand on the international side, I have to say, a little bit of a turnaround or an improvement in your tone there relative to even the Investor Day you had back in September. It sounds like some of those countries, you're seeing stronger trends there. I'm just wondering, obviously, you talked about product market fit, but any more detail you could give us about why you think that's picked up a bit in some of those countries?
Yeah, Walter, sure can. You're right. At Investor Day, we were pretty candid, and I was, about seeing the opportunity outside the U.S. being much larger with the potential to grow faster than we were able to produce in fiscal year 2016. Our teams were already on that. I'm simply the radio man. The good news is they were working on closing out that last mile of getting the product compliant and at the level that these countries expect. We got there for Canada, the U.K., and Australia. As a result of that, net promoter scores are going up, and we've leaned in to go-to-market activities in those countries.
The team also has. We've seen, by the way, the corresponding increase in growth from 45% up to 50%. I've called out the U.K. specifically, which exited last year at 78%, now it's at 87%, and just continues to build momentum. These other remaining countries have their own timelines to get that last mile completed for product market fit. They're very near term, so we expect to see those coming online as well. I'm optimistic that we're on it. We know what the right levers are. The first quarter showed that if we focus on it, we can actually get the numbers moving in the direction we want. You should hear some more optimism in my tone now because I'm starting to see the proof points pay off.
Okay. Then just relative to desktop, I heard the comment on the operating system upgrades driving some of that. How much of that would you say was people who may be recommitting more than you expected to the desktop? Obviously, the online subscribers overall this quarter were quite strong, but as we look out a couple quarters, how does potentially more of your customers recommitting to desktop impact what you might be looking for in terms of online subs as we get out a year or more as maybe some of those would've moved over?
Walter, we actually feel like we're expanding the category by having both offerings in the market. Primarily, the desktop business was the result of the operating system upgrades. Windows 10 drove an upgrade cycle, then the operating system upgrades in Mac, it was about 60/40 Windows and Mac. If you pull those out, it was basically flat to down 1% without the upgraders, I'd say that kind of normalizes things out for us. If you look at the total customer base, and you count it the way we used to, which we no longer put out on the fact sheet, those are people using at least the last three years' version of desktop, or they're buying a subscription. The total base grew in the neighborhood of 5%, and that's up from where it was when we exited last year.
If you break that down, you mentioned QBO subs are strong, 41%. The desktop got a boost to this upgrade cycle, which pushed it up to 23%, you put it all together, the total paying customers in this last period was up a total of 33%. I do not see cannibalization happening. I do think we were the beneficiary of these operating system upgrades. We are going to continue to have a good quality desktop offering, but we're leaning into the cloud, the customers are choosing the cloud. I'd say that net-net, we're growing the category.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from Jesse Hulsing of Goldman Sachs. Your question please.
Yeah, thanks for taking my question, guys. I wanted to drill in to your expectations for payroll and payments moving forward a little bit more. Payroll subscribers accelerated. I'm curious what your thought is on whether that acceleration is sustainable. I'm wondering, on the payment side, when you start to see the impact of the invoicing product start to hit the model. Thank you.
Yeah. I would say, Jesse, first of all I'm sorry. We do see opportunity to continue to strengthen our performance in both payroll and payments, and the team's focused on that just like we are with our international expansion of QBO. I feel good that the team knows the right levers, and we're continuing to optimize and improve. Currently, right now, if you look at the penetration rates into the customer base, payroll is at 15% in QBO, and that compares to roughly 32% in desktop, so we've got a lot of headroom there. Payments right now is in the neighborhood of 6% in penetration, and that's a little ahead of desktop, and we think that opportunity just has more headroom as well.
Our outlook is that we're going to continue to focus on this, and we're going to continue to have you focus on the penetration numbers because that's the ultimate sign. The payoff for us is we've been guiding subscriber growth of QBO greater than 40%, and we saw it uptick to 41%, and we've been guiding QBO ecosystem revenue of between 25%-30%, and we saw it tick up to 26% in this quarter. That's the proof of the opportunity we have. If we just stay focused on those two numbers, we're going to see strong payroll and payments growth and strong overall FPG growth.
Thank you. Our next question comes from Keith Weiss of Morgan Stanley. Your line is open.
Hi, this is Sanjit Singh for Keith. Wanted to toggle back to some of the dynamics behind subscriber guidance or the subscriber performance this quarter. If I recall last year, I think, you had some challenges in India, and there was sort of a reset in terms of strategy there. I think in Canada also, there was a change in go-to-market. I guess what my question is how much of this quarter's performance in terms of the year-over-year growth is coming off of easier comps? Going into the second half, is it just a function of better feature functionality driving that international growth going forward? Is that the right way to think about it?
Okay. Great question. You're correct. Last year, as we had a period where we didn't feel like our non-U.S. growth was reflecting the kinds of opportunities we see ahead of us, we did have two countries that were in a pivot, Canada and India. Canada was actually because we had tried a test of selling a QBO subscription in a retail box in retail stores. What we found were we were getting units, they were attriting. They were dropping off after a 90-day period, we literally didn't like the quality of the sub, we pulled that out, and we had a grow over. Canada has since been picking up momentum and growing. The real upside here was not just Canada.
In the U.K., where we went from a 78% growth rate in Q4 to an 87% in Q1, shows that it's picking up momentum, as is Australia. I would tell you, this is less about a year-over-year easy comp, this is more about that product market fit and leaning in to go-to-market, that's the kind of feedback we're hearing from customers. Of course, we have the other three countries that we're getting to the last stage of product market fit as well, we'll start to lean into those in the back half. That's why we feel like our $2 million-$2.2 million target is absolutely the right target to be given.
Understood. Thank you for that. Just a quick follow-up and an update on maybe some of the unit economic metrics. If we look at if there's any comments you have on renewal rates in terms of QBO and maybe by segment. Also with respect to ASPs, I noticed on the Analyst Day that the ASPs for QuickBooks Self-Employed were up pretty nicely versus fiscal year 2015. Could you give us any sense of how ASPs by QBO segment look like this quarter? Are those trending up?
Yes. Do you want to take this one, Neil?
Sure, Stan. I'll give this a shot. It's Neil. If you go back to the guidance we gave in the conversation we had at Analyst Day, there are a number of moving parts in this. Clearly, QuickBooks Self-Employed, as Brad mentioned, is growing quite nicely, which is overall providing some downward pressure on our overall ASPs. We did implement a price change in QBO in the U.S. midway through the first quarter this year, which had a little bit of impact and will impact for the balance of the year. It's a very modest price increase, but it's on a fairly large base. As we've already talked about, we're probably focused more on retention and driving the value of the accounting product outside the U.S., where you know we don't have the same potential for payroll and payments attachment we do in the U.S. at this time.
First quarter looks good to us. Looks like we're very much on track with our expectations. You saw the acceleration in the online ecosystem revenue by a point. Early in the year, but so far, I think the plans we made are playing out exactly as we expected.
Exactly.
Any early indication on renewal rates in Q1?
Nothing, no substantial change from what you saw at the end of last year.
Perfect. Thank you so much.
Okay.
Thank you. Our next question comes from Ross MacMillan of RBC Capital Markets. Your question, please.
Thanks for taking my question. Brad, a couple, maybe the first one is just on the online payroll adds of, I think the online payroll adds were 40,000. That's up a lot relative to the run rate you've been doing. What actually happened there? Was there some international payroll markets that opened up, or was there any other high-level driver for that this quarter?
Yeah. First of all, one of the things we are continuing to do is improve the online payroll first use experience. One of the areas that the team's leaned into is make it easy for you to come in and then contextually find additional services like payroll and payments. We did have a reclassification, which may give you a little bit of a pop in the fact sheet, of about 7,000 units that had been attributed to the QuickBooks Mac product. It had been attributed to Desktop. It's now being attributed to Online. That's where it should've been classified along the way, so it's giving you a little bit of an additional bump. Underneath that is really strong growth.
With those tens of thousands, you talked about roughly 40,000, the bulk of those are just continuing to improve the user experience, and then there was a 7,000 subscriber pop as a result of a reclass.
Okay. That's helpful. It wasn't like you opened up an international market to payroll for the first time. There was nothing like that? No.
No. Neither was.
Okay. That's helpful. I'm curious now that you've opened up Self-Employed, I think you said to U.K. and Australia. When I look at the overall net international adds, any sense for how material the Self-Employed addition was within the international adds?
Well, I put it in total aggregate, and if you look at it in aggregate, we added 25,000 Self-Employed subs in the first quarter, and that compares to 60,000 in the full 12 months of last year. We weren't in the market for the full first quarter in the U.K. and Australia. That's been in more recent weeks, but the early results have been very positive. I would say overall, most of that acceleration continued to be in the U.S., but we're getting some upside with the new country expansion.
That's very helpful, and great to hear the active base going up 5%. That's a very good number. Congrats from me.
Thank you, Ross. Appreciate it.
Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your line is open.
Thanks. Good afternoon. Guys, I'm going to switch it up and go over to tax. Brad, curious, with the PATH Act coming up in this upcoming tax season, just curious how you think that's going to shape early season filing behavior. It looks like the storefront guys are going to have some new refund advance products. Just your thoughts on how you might compete with that. Thanks.
Sure, Scott. Every year is an exciting year in tax. Our team is geared up. We've got some really cool product innovations and go-to-market campaigns, and the team's itching for the season to start, for that first whistle to blow. Obviously, we do have the PATH Act this year. Those are for people who have earned income tax credit or for those who actually have a child credit. The IRS, working with the rest of the industry, has decided to hold those refunds till February 15th, which helps us increase W-2 verification and prevent fraud. We've been very supportive of that. We believe fundamentally, though, that the IRS and the industry is still leaning in, so we're not out of 10 returns will actually get the refunds back in 21 days.
We don't see a material change in the seasonality, we're fully prepared to help those people get their money. In terms of some of the stores leaning in with these refund anticipation loans, we pulled out of that business, as you know, more than a decade ago, and you can go back and track our results. While they have had refund anticipation loans and we have not, we've been able to manage to grow the do-it-yourself category and to gain market share over that period of time. We fundamentally don't see a shift in any sort of method behavior based upon history, and we are fully prepared to help those people with earned income tax credit get their refunds.
Great. Thanks, Brad. Just on a follow-up, what are you expecting for industry growth this year in tax with the IRS? Just your thoughts on potential influence this year or looking out a few years given results of the election. Thanks.
All right. Well, our assumptions right now are in the neighborhood of 1%-2%. We typically are in the 0%-1% range. Right now, everyone in our business, as well as some of the industry, is suggesting it might be a little more robust this year. We'll have to see somewhere in that ZIP code of one to two. In terms of what's happened with the election, you know as well as we do, we've been in this business now for over three decades, we hear a lot of really good intents, ultimately what happens when the new president and Congress get in is what can we actually turn that into. I would tell you that we remain dedicated and supportive of things like tax simplification. We've been big supporters of that, very vocal about it.
We're very supportive, vocal about voluntary compliance, we're also big fans of putting more money in the pockets of small businesses and consumers paying less tax. Far, that's sort of what we're hearing, we haven't gotten to January yet. We don't have the new president-elect in office and the new Congress. Right now, we're just prepared to do what we always do, is have the best product in the market and try to win the customer one customer at a time.
Great. Thanks.
All right.
Thank you. Our next question comes from Michael Nemeroff of Credit Suisse. Your line is open.
Thanks for taking my questions. Brad, do you have maybe any early data points regarding the subscriber contribution from some of the new ecosystem partners, namely G Suite and Amex, and what are your expectations for subscriber contributions towards that 2 million-2.2 million subs in the year? Then for Neil, on tax, now that you're selling the SE product bundled with tax, I'm curious how you're going to recognize tax revenue coming from SE. Is it going to be on a subscription? If so, do you expect any impact in Q3 from that SE product with tax?
Okay, Michael, I'll take the first one, give Neil the second one as you had asked. In terms of an individual partner subscriber contribution, we haven't provided any of those breakdowns, but I can bring it up to an overall impact. We know when one of our small business customers attaches a third-party product, that increases the retention of QBO 10 points. We are big fans of these partnerships that we're announcing because we think it improves not only the customer experience because they can solve additional problems, but also it helps build more retention into QBO, which is one of the biggest levers we have in terms of recurring revenue. That's sort of how I would look at it at an aggregate level. Do you want to talk about the bundle?
Sure. We're excited about the TurboTax Online/QuickBooks Self-Employed bundle, and we'll see how that plays out. The way we're going to treat that, Michael, is that we're watching carefully to see how those customers engage with QuickBooks Self-Employed after tax season is over. For those customers who are active and who use the QuickBooks product
We will defer and allocate part of that revenue over the 12-month subscription period that they're entitled to use QuickBooks Self-Employed. We have some assumptions around what those utilization rates are that are baked into our guidance for the year, both for units and for revenue. Certainly, if we see that play out differently and we see the guidance change either by quarter or for the full year, we'll let you know. For those customers who do activate and use the self-employed component of the bundle after tax season is over, we will be allocating a portion of what they paid over the 12-month period that the subscription covers. That's reflected in the guidance we have for the full year. When we come back and give you guidance for Q3 and Q4, we'll have those assumptions baked in.
Okay. Thanks very much, guys.
All right. Thanks, Mike.
Thank you. Our next question comes from Yun Kim of Brean Capital. Your question, please.
Thank you. Congrats on a solid QBO sub number, Brad. I guess lost on the overall strong QBO Self-Employed performance is that your core U.S. QBO subs, when you exclude the Self-Employed version, actually grew strong in the quarter for the first time in a while, especially off somewhat of a slowdown last year. I know it's just one quarter, do you expect that part of the core traditional QBO subs to rebound this year? Is that heavily influenced by what you're doing currently with focusing on the accountant programs and whatnot?
Yeah. Thank you, Yun Kim. First of all, I really appreciate that you called out the U.S. QBO subs number. We're also very pleased with those results. We think there's more in the barrel for us to get there. In fact, we talked about these innovations that'll really kick in for the second half. Talking about that first use experience, the ability for a first-time user to come in and get to their P&L in less than five minutes, we think will be really cool for funnel conversion. The other thing is this invoicing tracking capability.
Think about that like the ability to have Uber or FedEx tracking for your invoice, where you literally can go in on your phone, you send the invoice, it'll let you know if it's been opened, then it'll let you know if it's been paid, and then it'll send you an alert when it's actually in your account. That's getting small businesses paid 15 days faster, over two weeks faster. We have other components we're adding in as well, like Google Calendar. The ability for someone to have their appointment in Google Calendar and then click on it, send an invoice, and have it flow right into QuickBooks and get paid. Those are all elements that not only help QBO outside the U.S., but will help accelerate our growth rate in the U.S. We think there is fundamental strength in the United States.
We're also looking at these non-U.S. markets, we think these innovations will only add some fuel to that fire.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from Kartik Mehta of Northcoast Research. Your question, please.
Thank you. Hey, Brad, I wanted to ask you a little bit about tax and the success you've had with Absolute Zero. As you see more competition in the marketplace, whether it's this RAL funding or your competitors kind of going to an Absolute Zero, do you think you have to expand that program to even include more forms to attract customers? Or do you think where you are and the strategy you're taking doesn't have to change?
Kartik, thank you for the question. We've been on a multi-year journey to reimagine this tax preparation process. Our goal is to eliminate 6 billion hours of tax prep drudgery, so you don't even have to answer questions. Last year, we knocked off 40% of the time it takes to file an average tax return in TurboTax, and we leaned into a leading mobile offering that no one else has. I think that is the source of our advantage and our market share gains. Just to give you a case in point, last year, we had a competitor who matched Absolute Zero, not only matched it in terms of the product lineup, but they even kept it out in the market longer than we did. We ended the program March 31st. They carried it through the end of tax season, and we still took share.
My fundamental belief is that price is not a durable competitive advantage, neither are promotions. It is the product and the experience you create for the customer, and we've got a three or four-year head start on the players in the market by basically reimagining this next chapter. The second piece on RALs I mentioned a few minutes ago, we pulled out of that business more than a decade ago, and you can go back and look, and I know you have. You and I've spent time talking about this. You can look at the do-it-yourself category growth. You can also look at our market share gains within that category, despite not having a refund anticipation loan.
We don't believe we're dealing with anything differently this year in terms of a RAL than we have for the last 10 to 12 years. We're fundamentally leaning into the product experience. We think it's going to be another competitive season. I like what our team has in the pipe, looking forward to the January 1st kickoff.
Brad, I just want to go back to what you were saying about the PATH Act and make sure I understood. Were you saying that even with the PATH Act, you anticipate that most refunds will be around the same time that customers got them last year? Was the point that the timing of the difference, whenever the IRS starts processing them, will be the same?
Well, if you put all 150 million returns that the IRS will process roughly in the year, nine out of 10 of those will actually get a refund back in 21 days or less. The PATH Act does actually narrow in on those who do earned income tax credit and those who have a child credit. They are going to have that refund held back till February 15th. For those who come in early, have those qualifications, and are hoping to get the refund sooner, they are going to be held back for a week or two here until February 15th. That will be an impacted group. Our goal is to help those individuals understand the status of their refund, keep them apprised, and make sure they have a great experience.
Fundamentally, I don't think this is going to shape or shift the overall tax season. That's our philosophy going in. We just want to make sure we're there for these customers. I don't think the refund anticipation loan, honestly, is going to shape the overall season. I think it's basically going to be a period of time. Then we're going to get past that.
Thanks, Brad. I appreciate it.
All right. Thank you.
Thank you. Our next question comes from Sterling Auty of JPMorgan. Your question, please.
Yeah. Excuse me. Thanks. Hi, guys. You talked about the strength in the QBO subs internationally, but I'm just kind of curious what your thoughts were around the additions here in the U.S. in the quarter relative to your expectation.
Yes, Sterling, as I shared a few minutes ago, when Young Kim asked about the United States QBO subs, we felt good with the strength in QBO in the United States, but we feel even more optimistic as we look at the balance of the year because the new innovations that are hitting, we think, are going to add more fuel to the fire. I think if you look at QBO Core in the United States, it's continuing to produce strong results with some cool innovations coming. The second piece is we have QuickBooks Self-Employed that's going to add more fuel to the fire in the United States. Of course, we do have desktop migrators. In the first quarter, we got a little bit of a bump there with these operating system upgrades. The migrators were up about 50% year-over-year.
Last year, they were up 25% overall. That's always a little bit of tailwind as well. We feel good about the United States and the QBO sub outlook as we look for the balance of the fiscal year.
Just one follow-up. In terms of some of the new functionality that you're bringing into QBO, do you expect any of that will actually have a material positive impact on the renewal rates as well?
We hope so. One of the things we do know is if there's an important problem that a customer has and it's one of the top things they request, we solve that problem well with a new feature, it improves retention. We fundamentally believe that the things we've narrowed in on are some of the most important and frequently asked feature requests. I feel good that the team not only has narrowed in on the right problems, but I also like the early results we're getting back in terms of customer feedback on those new features. Our goal is to continue to push retention up, I think it will continue to help us do that.
Thank you.
All right.
Thank you. Our next question comes from Jim Macdonald of First Analysis. Your line is open.
Yeah. Thanks, guys. Could you give us a little more on the quarterly shift? You said one point of tax into the January quarter, could you talk about is that just taken out of the next quarter? I mean, 1% of sort of what?
Yeah. Hi, Jim. This is Neil. The way the calendar falls in 2017, the 31st of January is actually on a Tuesday. In 2016, it fell on a Saturday, and we know a lot of people do their tax returns over the weekend and actually file them on Monday. When we factor in for 2017, getting the full 31 days of January into our first quarter, it would make our growth rate, the way we look at it, for TurboTax revenue in Q2 about a point or so higher than the growth rate we posted for last year.
I know getting seasonality right on consumer tax is always a challenge for you guys, just to let you know, the way we see it playing out is we would see our second quarter growth in consumer tax about a point or so better than the growth rate we posted last year, just because there are a couple of extra days customers can actually file their returns, taking into the weekend into account and getting them into our Q2. It's a total shift from Q3 to Q2. It doesn't change the full-year outlook. It doesn't mean there are more taxpayers or anything like that. It's just an anomaly with the way the calendar falls and the way consumers have time to work on their returns.
Just to clarify, last year, there was a shift, a big shift, you had a big growth of consumer tax due to the shift back. Are you saying it's going to be 1% more than the 30% last year?
Yeah. Last year was actually a return to more normalized trends after the year before that, having a delay with the IRS opening to receive returns. We kind of view 2016 as being a more normalized Q2 for us in terms of consumer tax revenue. Yeah, say a point or so above that.
Okay, thanks.
Thank you. Our next question comes from Patrick Bovill of Redburn Research. Your line is open.
Hi, guys. Great quarter. Thank you so much for taking my question. Can we just circle back on the Desktop unit growth and why the drivers that we saw this quarter wouldn't persist through the fiscal year?
Okay, Patrick, I'm going to ask you to repeat the first part again because you cut in and out a little bit, and I couldn't hear what the particular product line you were asking about was, please.
Sure. On the desktop unit growth, why the drivers that we saw this quarter wouldn't persist through the fiscal year?
Got it. Okay. Well, we fundamentally believe that a lot of the goodness we saw was the result of the operating system changes from both Windows and Apple. We saw Windows 10 upgrades, and we saw the macOS upgrades driving a lot of this early strength. We think that a lot of that, if you just look at the natural upgrade cycle, has probably occurred. There will be a little bit of strength potentially here in Q2, but as we look at it for the balance of the year, we don't think it's going to persist through all four quarters. That's really the hypothesis we have at this point.
Got it. Can I just ask a quick follow-up on the tax business, just to help the non-U.S. based analysts. Tax simplification, if that were to happen, I'd probably see that driving share shift to the DIY category, but probably also driving ASPs a little bit lower. Is that right?
Well, first of all, we do agree with you. We think tax simplification would drive more people to basically do the taxes themselves. In terms of whether it would drive ASP lower, there are other value-added services that we provide that basically help consumers say, "Hey, I'm willing to pay for that particular service." We don't fundamentally believe that it ultimately leads you to a lower ASP. It basically puts more energy into what are the other services you can offer a tax filer that they're willing to pay more for, and those are the things that our team's been leaning into over the last couple of years. I would agree with the first concept. We don't believe it naturally suppresses ASP on the second concept. It just puts more innovation into areas beyond the actual tax filing itself.
Awesome. Thank you very much.
You're welcome. Thank you, Patrick.
Thank you. Our next question comes from Michael Millman of Millman Research Associates. Your question, please.
More tax, I guess, the PATH, if it's a concern at all, is basically word gets out on the street and people delay, but no big thing in terms of the full year. Would you agree with that? Or at least certainly you'd agree with the second part.
Michael, we agree with the second part. I do know there are families that are hoping to get their money as soon as they can, and that's important, and we don't take that lightly. Neither does the IRS or the rest of industry, we want to try to help them get that. I think to your second point, it doesn't change the outcome of the full year, and that's what we're looking at.
Okay. Some other questions on, I guess, conversion and retention type of questions. I was wondering if you'd give us some feel and maybe more than a feel on what you're seeing in conversion from people going to the website. Are you in fact seeing more people driving to the website? To what extent are you seeing conversion changes in free to price? Then I have a couple retention questions. We'll start there.
Okay, Michael. First of all, I want to make sure, are we still on the tax topic here?
Oh, yes. On tax.
Okay, got you. Obviously we don't have any real conversion and retention numbers to talk about at this moment because we haven't kicked off the new season. If you go back to our Investor Day deck that we shared in the fall, we laid out some pretty good detail on the funnel, and it's actually on page 63 of our Investor Day deck, just to let you know the specifics. It talked about the fact we had roughly 92 million people who came in and visited turbotax.com through tax season. Then it talked about how many of those converted into logins, then actually filed a return, and then the net on that. You'll see that we laid in there basically the improvements in conversion at every step along the way, and then the ultimate impact in retention.
I feel good about that. Then the following page talks to your free to paid. Obviously, we introduced Free back in 2004, 2005, and we were getting about $29 a return and making about a 60% margin back then. Last year, even with a very aggressive Absolute Zero, we made $49 a return, and margins were around 65%. Our free to pay continues to be a muscle we have refined and developed. We haven't broken down the actual % of how many of them we convert, but you can look at the aggregate number and see that not only are we driving the revenue per return, but we're also improving the margin. That data's in that Investor Day material, and hopefully you'll get the chance to take a look at that, and it'll give you a little more specifics on each of the key areas.
Thank you.
Okay.
Thank you. Our next question comes from Shankar Subramaniam of Bank of America Merrill Lynch. Your line is open.
Hi, thanks for taking my question. I'm asking the question on behalf of Kash. Just on the online payment and online payroll, can you talk about the attach rates that you're seeing right now, relative to fiscal year 2016? Where do you see that going, especially given the growth in SE? Do you see an inflection point where you can actually see the attach rate growing from here?
Sure, Shankar. First of all, let me start with the reason why we try to talk about penetration rates is because we think that's the ultimate payoff, and that leads to ecosystem revenue growth. Right now, there's two big numbers that we look at. One is what's the QBO ecosystem revenue growth? It's 26%, which is up a little from last quarter. The second piece is what are the penetration rates of payroll and payments into the QuickBooks Online base? Those are currently 15% for payroll and 6% for payments. Lots of upside opportunity, but good strength. Now, one of the leading indicators is an attach rate. We're trying to pull back on that because attach rates get muddied. They get muddied because QuickBooks Self-Employed, by definition, does not have a payroll. They don't have any employees.
They go into the QuickBooks Online base, and if you start doing the math, you'll say, "Looks like we got a problem here. Attach is going down," but it's not. It's QuickBooks Self-Employed is becoming a bigger part of the mix. The other thing that throws you off if you talk about attach rates is we will do promotions at times, whether it's a buy now without a bundle, or it might even be something with accountants who in turn then get the customer to start to think about payroll and payments down the road, and those can muddy the waters. I'll answer the question on what are the attach rates right now. It was 15% in the quarter for payroll. It was 9% for payments.
You have to put that caveat next to it, which is we had a big mix of QuickBooks Self-Employed, and we also had some growth outside the United States where we don't yet offer payroll and payments, and those numbers are going to make the attach rates look a little bit distorted.
Got it.
I would say focus on 26% ecosystem growth, which is up from 25%. That's the real health indicator.
Got it. Just one more question on the QBO sub growth for fiscal 2017. Given that the Q1 was above your expectation and all the other international growth and SE seeing strong traction, what's the give and take about exceeding your expectations for the fiscal 2017? Do you see more optimism that that's probably a conservative estimate and it can actually exceed it? Or is that more realistic target given with your new data?
If you go back and look at what it would take for us to deliver the 2 million-2.2 million subs, it would take subscriber growth between 32%-45%. Right now, we just clocked 41% in Q1, which is an uptick from last quarter. We did walk through some of the innovations we have in the market now that we've introduced that we think gives us confidence that we're going to be able to deliver that 2-2.2 million. It's still too early in the game for us to say, "Hey, our confidence is now that we're going to go past that 2-2.2." Hopefully it gives you enough assurance to say you can see momentum in the base growing, and you can hear the innovations coming.
Honestly, it gives me a little bit of confidence to hear that the question is now, "Are you going to hit the number?" Now it's actually, "Are you going to exceed the number?" We feel good about the things in the pipeline, it's too early for us to say that we're going to be looking at raising guidance.
Got it. Thanks.
Okay.
Ladies and gentlemen, I'm not showing any further questions. Would you like to close with any additional remarks?
Yeah. Thanks, Lateef. I'll tell you, we're encouraged with the strong start to the fiscal year, we really do feel like we have some momentum building with some new innovations in the market. With that said, you all know us well. Our biggest quarters are still ahead of us, we are looking forward to that whistle blowing and getting into peak season. I want to thank everybody for your questions today. For those of you who are in the United States and celebrating Thanksgiving next week, we want to wish you a happy holiday. For everyone else, take care, and we'll speak with you soon. Thank you.
Ladies and gentlemen, thank you for participating. This concludes today's conference call.