Earnings Call: Q4 2015

Aug 20, 2015

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 fourth quarter and full year fiscal 2015 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 number 1 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 Matt Rhodes, Intuit's Vice President of Investor Relations. Mr. Rhodes? Thank you very much. Good afternoon, everyone, and welcome to Intuit's fourth quarter fiscal 2015 conference call. I'm here with Brad Smith, our President 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 2014, and our other SEC filings. All of those documents are available on the investor relations page of 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. All reported results and fiscal 2016 guidance exclude Demandforce, QuickBase, and Quicken, which have been declared held for sale and reclassified to discontinued operations. 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 Smith. All right. Thank you, Matt. Thanks to all of you for joining us. We have positive results to discuss for the fiscal year that we just finished. We also want to share some strategic decisions that position us for accelerated performance longer term. With that, let's get started, and I'll begin with our results. We closed out our fiscal year 2015 on a strong note with excellent momentum in each of our businesses. For the full fiscal year, total revenue and earnings per share both came in above the high end of our guidance range before reclassifying our planned divestitures. QuickBooks Online reached nearly 1.1 million paid subscribers through the end of the quarter, also ahead of our guidance for the fiscal year, which we increased mid-year. Looking beyond the current period results, we're playing from a position of strength. We're fully committed to winning in the cloud. We're focusing our attention and investments on assets that accelerate our ability to deliver our two strategic goals. First, to be the operating system behind small business success, second, to do the nation's taxes. With this focus, we have decided to divest Demandforce, QuickBase, and Quicken. Let me provide some context about why we made these decisions. Demandforce and QuickBase are great businesses, but they don't support the QuickBooks Online ecosystem, and both serve customers that are upmarket from our core small business customers. For Demandforce, we're seeking a buyer who will invest in this industry-leading marketing solution with a growing and talented sales force. Divesting QuickBase has a similar effect, freeing both Intuit and QuickBase to focus on better serving the needs of our respective but distinct customers. As you can imagine, Quicken holds a special place in the hearts for all of us at Intuit. It was our first innovation and the cornerstone of the company that we've built over the past 32 years. Quicken is a strong, healthy business and remains America's number 1 personal finance software. As you know, Quicken is a desktop-centric business, and it doesn't strengthen the small business or tax ecosystems. Our strategy is focused on building ecosystems and platforms in the cloud. We value our loyal Quicken customers, and we're seeking a buyer who will provide the product support and the service they deserve. These decisions impact our longer-term financial trajectory, which Neil will provide more detail on in a moment. First, let me click down and share my reflections on the company's performance, starting with our small business group. QuickBooks Online continues to build momentum. We grew total QuickBooks Online subscribers by 57% in the fourth quarter, up from 55% in the previous quarter. This represents the ninth consecutive quarter of accelerating paid subscriber growth. We added 110,000 QuickBooks Online subscribers in the quarter, and we now have 1,075,000 paid subs worldwide. Roughly 25,000 of our QuickBooks Online subscribers are using QuickBooks Self-Employed, which is up from 15,000 last quarter. Outside the U.S., QuickBooks Online grew over 135% to 198,000 paying subscribers. Shifting to our consumer tax business, the team delivered an exceptional year. As the category champion, we helped drive digital category growth of about 5%, compared with the assisted tax prep method being roughly flat. Within the software category, we estimate that TurboTax Online gained about a point and a half of share, translating into four points of share gains over the past two seasons. In the U.S., TurboTax Online units grew 11%, and total TurboTax units grew 7%, excluding the Free File Alliance. Hitting the total key, consumer tax revenue grew 8% for the fiscal year. It's a little too early in the game for me to talk about our tax strategy for next season, but as we've demonstrated for two consecutive years, we will continue to focus on driving customer growth and share. Security will also remain a critical priority for us. We're working closely with the IRS, state governments, and the tax prep industry to create a new set of common security standards and data protocols to accelerate the fight against tax fraud. We'll continue to invest in this area to lead the charge towards greater security for all taxpayers. In addition, the proposed Information Sharing and Analysis Center is particularly critical to enable information sharing among federal and state governments and the industry. This will significantly strengthen our efforts to collectively find solutions and to fight fraud. When you sum it all up at the company level, customer growth is accelerating, active use is improving, and global adoption is hitting a stride. We are creating a clear value proposition for our small business and our tax customers, and we continue to innovate and take share in our large addressable markets. We're investing in the areas with the biggest long-term payoff, setting Intuit up for strong customer and revenue growth for years to come. With that overview, let me turn it over to Neil, who will walk you through the financial details. Thanks, Brad. As Matt mentioned upfront, the results I'll discuss exclude the assets held for sale that are classified as discontinued operations. We've included a supplemental page on the fact sheet that shows fiscal 2015 and historical results, including the assets held for sale. For fiscal 2015, we delivered revenue of $4.2 billion, non-GAAP operating income of $1.1 billion, GAAP operating income of $738 million, non-GAAP earnings per share of $2.59, GAAP earnings per share of $1.28. For the fourth quarter of fiscal 2015, we delivered revenue of $696 million, a non-GAAP operating loss of $16 million, GAAP operating loss of $130 million, non-GAAP loss per share of $0.05, and GAAP diluted earnings per share of $0.05. These results factor in our decision from last year to deliver ongoing services and releases for certain desktop offerings to encourage migration to online solutions. As a result, revenue for these desktop software licenses is now recognized as services are delivered rather than upfront. Turning to the business segments, total small business group revenue declined 5% for the quarter and 2% for the year. Better results than we expected. QuickBooks total paying customers grew 7% for the year, accelerating from last year. Small business online ecosystem revenue grew approximately 25% for the year, excluding Demandforce and QuickBase, and customer acquisition in our online ecosystem continues to drive growth. QuickBooks Online subscribers grew 57%, accelerating from last quarter. Online active payments customers grew 5%, and online payments charge volume grew 19%. Online payroll customers grew 18%. We're very pleased with customer growth and revenue per customer for QuickBooks Online subscribers in fiscal 2015. We're expanding the market, which is great news for the long-term health of the business. We're bringing in newer to the world small businesses with QuickBooks Self-Employed, and we like QuickBooks Online subscriber growth outside the U.S. More than 40% of our QuickBooks Online subscribers have been with us for less than a year. Many of these customers are on introductory promotional pricing, so we expect our revenue per customer to increase over time. Additionally, we have opportunities to grow revenue per customer by improving retention and attach longer term. We'll provide more detail on average revenue per customer at our Investor Day on September 17th. We are focused on opportunities to improve conversion and retention around the globe, which are our two biggest levers for driving monetization. As we continue to focus on driving customer growth and expanding our total addressable market, we expect customer growth will continue to exceed revenue growth. Switching to desktop, total desktop ecosystem revenue declined 10% for the year, as expected. QuickBooks Desktop units declined 14% for the quarter and 22% for the year, as we continue to emphasize QuickBooks Online. The strong acquisition of new customers in QuickBooks Online has more than offset the decline in desktop units. Moving over to tax, consumer tax revenue grew 8% for the year. We will continue to invest in the product experience and to prioritize growth in customers over margin expansion. ProTax revenue declined 33% for the year due to changes in our offerings that resulted in ratable revenue recognition. These changes shifted roughly $150 million in revenue to fiscal 2016. Our ProTax business also had a great season, with customer growth coming in higher than expected, new offerings beginning to have an impact, and revenue exceeding the high end of our guidance range. 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%. With approximately $1.7 billion in cash and investments on our balance sheet, our first priority is investing for customer growth. In fiscal 2015, we completed six acquisitions totaling approximately $120 million. These acquisitions brought talent and technology to help us achieve our strategic goals. When it's the best use of cash, we'll return cash to shareholders via share repurchases. In fiscal 2015, we repurchased $1.25 billion of shares. We have $2.6 billion remaining on our authorization, and we also reduced our share count 2% net in fiscal 2015. We expect to be in the market each quarter in fiscal 2016. Our capital plans include a cash dividend of up to $1.20 per share for fiscal 2016, with the first quarter dividend of $0.30 per share payable on October 19. This represents a 20% increase versus last year and reflects our confidence in our business strategy and our large and growing cash position, as well as more recurring and predictable revenue streams. You can find our guidance details in our press release and on our fact sheet. One thing to note is that Mint Bills, and OFX were a part of the consumer ecosystem group but are not included in the assets held for sale. They will be reported as part of the small business segment going forward, given the importance of those assets in the QuickBooks ecosystem. Selling the non-strategic assets we discussed pulls around $250 million in revenue and $0.10 in non-GAAP earnings per share out of fiscal 2016. We will be reporting these held for sale assets as discontinued operations, and our P&L has been recast on this basis for all periods presented. We guided fiscal 2016 QuickBooks Online subscribers of 1.450 million-1.5 million, growth of 40% at the high end of the range. Last year at this time, we talked about our long-term outlook to help you bridge the transition in our business model. Let me take a minute to share how I'm thinking about our progress versus the outlook we discussed last year. QuickBooks Online customer acquisition remains strong, and we're feeling confident in our subscriber target for fiscal 2017. This is a franchise with a bright future. We told you we'd end fiscal 2017 at 2 million subscribers. We are confident in the long-term monetization potential of these customers and our expanding addressable market. Given the planned divestitures and the projected mix of small business customers, I don't expect us to book revenue of $5.8 billion in fiscal 2017. This will likely take another year or so. The third component of our long-term outlook was an earnings per share target of approximately $5 per share. Our first priority is investing in the long-term value of this franchise, as you'd expect. We're selling some things that don't fit strategically. We'll continue to prioritize customer growth over margin expansion near-term. The excellent growth we've seen in 2015 leads us to be more focused than ever on our businesses with the most traction and best growth opportunities. With that, I'll turn it back to Brad to close. All right. Thank you, Neil. Let me spend a moment on the fiscal 2017 outlook that Neil just summarized. As a management team, we take our commitment seriously. At the same time, we remain committed to making the necessary decisions to position this company for an even stronger future. Our transformation from a North American desktop software company to a global cloud-driven company is tracking ahead of our expectations, as illustrated by the QuickBooks Online paid subscriber growth that Neil just covered. With that said, as we expand our categories and enter new markets, the customers we're bringing in are earlier in their life cycle. When combined with our decision to divest assets that no longer strategically fit, the result is a conscious decision to push out our fiscal 2017 revenue target just a bit. I've never had greater confidence in our strategy, in our execution, or in our trajectory as we build this company for the long term. We've just closed out another great year. Our small business momentum continues to build. Our QuickBooks Online ecosystem growth is accelerating, driving value for customers and for Intuit. Our tax business had another season-winning year, delivering great products to our customers, as well as outstanding financial results. We've made tough decisions to sell non-strategic assets. We've prioritized our investments on those initiatives that will further accelerate our online ecosystem globally while ensuring the best product experience for customers who wish to remain on desktops. If history shows us anything, it's that we have a proven formula. When we innovate and delight customers with the best solutions in the market, we expand our categories, we grow our share, and we increase lifetime value over time. Our cloud-based solutions are doing just that, they will accelerate our company's overall performance as a result. We'll talk more about these themes and our strategy to execute against them at our Investor Day, which we're going to hold on our Mountain View campus on September 17th. We do look forward to seeing everybody there. With that, Latif, let me open it back up to you to 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Our first question comes from Brad Zelnick of Jefferies. Your line is open. Thank you very much, thanks for taking my question. A lot of interesting news today, Brad. It's good to see you maintain your $5 EPS target for 2017 and the increased capital returns, post the planned divestitures. Can you just help us resolve your comments about, or Neil's comments, if it is, about prioritizing growth while still being able to deliver $5 in EPS in 2017? Specifically, where does the margin come from in order to hit that goal, assuming that the combined businesses that you're divesting are profitable? Can you give us some insight there? Thanks. Yeah. I'll tell you what, Brad. First of all, Neil and I will tag team on this. Let me start by just clarifying one thing. We see a path to achieving a $5 EPS goal in 2017, our first commitment is continuing to invest in growth. As you think about the three pieces of outlook we provided last year, which were really to help you bridge the accounting change to ratable revenue, they weren't really a multi-year forecast. They were more of, look, here are key milestones. We feel very good about our QBO subscriber target. We've consciously made a decision to push out that revenue a year or so, we still see a path to achieve a $5 EPS target, we're gonna trade that off against whether or not we have better alternatives, whether there's investments to accelerate our markets or increase our customer growth. We'll provide more guidance on fiscal year 2017 when we actually get to the end of next year. With that said, let me talk to you about how do you get that kind of leverage. First of all, the number one lever we have is accelerating top-line growth. We are increasing our total addressable markets. We'll talk more about this at Investor Day. We're accelerating our customer growth, and we see real plans, clear plans for monetizing these customers, and I'll give you an example. Neil mentioned that 40% of the QuickBooks Online base are in the first year with the product. We know that as you enter year two and year three, that average revenue per user increases over 50%. Just as they mature and move into year two and year three, we have real leverage to produce more revenue per customer. At the same time, the thing that's exciting us is over 80% of these QuickBooks Online customers are new to the franchise, we're actually expanding the category and accelerating top-line opportunity. The other thing I'll tell you is Neil and the team, and all of management team, remain very disciplined behind our financial principles. We invest in things that we can see a 15% rate of return, and whether those are internal investments to expand R&D or new markets, or they're stock repurchases or acquisitions, we're going to continue to use our capital judiciously so we get the best return on that capital. It's basically accelerating our top-line growth, remaining rigorous about our capital allocation, and that gives us the path to $5. We'll talk about whether or not that becomes our target in fiscal year 2017, when we actually set expectations at the end of next year. Neil, anything you'd add to that, or- No, I think that's fair. I think that covers it, unless Brad has another question. Okay. Yeah, I just have one quick other one, and I might have missed this, but did you comment to new QBO attach rates for payment and payroll in the U.S.? Can you give us an update on those numbers? We didn't, Brad, but I can. New QBO right now for payroll is running at 23% attach rate, which is consistent with last quarter and where we thought it would be. Payments, once again, took a step forward. We're now looking at an 11% attach rate on new QBO, which is up from 9% the last time we provided the numbers. The attach rates continue to look healthy on both of those attach services. That's great. I don't mean to be a hog, but while we're on that topic, just one more. If you look at payroll, Brad, and you parse it through for sort of an apples-to-apples. If I take QBO, but I eliminate Self-Employed and international subs where there may not be an opportunity to attach, what do the attach rates look like then when comparing QBD to QBO on an apples-to-apples basis? Go ahead, Matt. It's Matt here, Brad. The attach rates would be lower. The 23% that Brad talked about is just for QuickBooks Online in the U.S. To the extent that self-employed starts to grow meaningfully, that could dilute it a little bit. We do think there's opportunities longer term to add payments or other services, including TurboTax, to those self-employed customers. Yeah. Brad, just to build on that, we've done, and we'll talk a little bit more about this, I'm sure, in Q&A, but we've done a half a dozen acquisitions in the last 12 months. Many of them were to accelerate our global expansion. Two of them were payroll-specific. We bought a product company called PaySuite in the U.K., which allows payroll attached to QBO, and we also bought a company called Acrede, which is a global payroll platform. As Matt said, while the numbers I gave you are U.S.-specific, we see real opportunities to start to increase attach outside the U.S. as well. Well, thanks again for taking my question. All right. Thank you, Brad. Thank you. Our next question comes from Walter Pritchard of Citi. Your line is open. Hi. Thanks. I guess, Brad, on your end, one of the things you have out there is an annual QuickBooks launch in the fall, I think you've talked about in the past that you're sort of diverting a lot of development resources away from the desktop product, I'm wondering how we should look at the launch in the fall. I mean, is this gonna be a full-fledged launch with lots of new features on the desktop product that keeps people buying that desktop product, or is there some catalyst you think in the fall that drives people to realize that, hey, maybe there's nothing new here, it's time to move over to online? I'd love to hear you incorporate in that. It looks like your desktop units actually declined less this quarter than we've seen for the first three quarters of the year, maybe that's leveling off. Yeah. Thanks, Walter. Let me start first with we're committed to keeping our desktop customers excited and satisfied with the product. Although you're correct, we have leaned much of our R&D energy into QBO and building out the cloud ecosystem. The desktop product will be a full-fledged launch. There won't be lots of new features. There will be important features and, most importantly, customer experience improvements that will help the customers continue to get the maximum quality out of a desktop product. What you're also going to see, though, is a little more of an elegant combining of QuickBooks Desktop and QuickBooks Online. When you go into the desktop product, you'll have an opportunity to say, look, do you want to use the desktop or the cloud version? You'll hear more about that when we get closer to launch. It'll give them more of a choice, so if they went to a retail store and they picked up a box out of habit, they still have an opportunity to potentially choose to go to the cloud or to desktop. That'll be one of the things you'll hear a little bit more about. In terms of the desktop units declining, as we got into the fourth quarter, we continued to run tests on how deep of a promotion we could run, what the promotional floor should be, and we think we started to find a sweet spot where we're able to continue to get customers who want to stay on desktop to upgrade without actually discounting so much that people avoid the opportunity to go to the cloud. That's why you saw a little less of a decline in the fourth quarter on units, down about 14% versus the full year of 22, and that really informs our go-forward plan as we look at fiscal year 2016. Neil, maybe on your end. We calculate the ARPU on QuickBooks Online to be down about 14% year-over-year. I heard in the prepared remarks you talk about how you feel about second-year ARPU, for example, and I think we understand that, but there does seem to be quite a bit of focus in the market, in the financial markets around that ARPU metric. Do you foresee this sort of 14% decline that we saw this quarter to be the bottom in that metric, or you think that actually could get worse as you continue to see accelerated volumes, especially on some of those lower-end products with new customer adds in fiscal 2016? Yeah. Walter, you have to look at the cohort, and you have to look at people coming in. As Brad mentioned, we have some tailwinds with customers who've been with us longer than a year, coming off of introductory promotional pricing. That helps us, but our goal is to continue to grow the product category aggressively. Some of that will be outside the U.S., where the software monetization will be a little less in the first year. We're going to talk more at Investor Day and show you some breakdowns between U.S. and global average revenue per user, and talk about some of the effects of the cohorts. Long story short, there's some advantages from those customers who've been with us for longer than a year and who attach more services. That's one of the reasons why I say that I expect the total number of customers to continue to grow faster than the revenue, because our hope is we'll continue to add at a very accelerated pace outside the U.S., and in categories like self-employed. We'll talk more about that on the 17th, and we'll see how it plays out. I'd be willing to take certainly some dilution in the revenue per user, to get a lot more customers and to grow the category. Great. Thank you. Thank you. Our next question comes from Brent Thill of UBS. Your question please. Thanks. Neil, on the fiscal guide, many investors are asking if you take out the divestitures, your guidance is still below where the Street was in print. Many are asking, is this partially due to a faster transition to the subscription model that is leaving you potentially with a little more conservative nature on the top line, but perhaps you're seeing something in terms of the backlog building on the subscription side that would lower your view for the year? Brent, I think there are two factors there. The first one you called out with the divestitures. We certainly had aggressive hopes for those businesses when we put our plans together a couple of years ago. That is the single biggest factor in the guidance that we talked about for 16. The other thing we're looking at, though, is the mix of customers in small business. I refer to this briefly in the script. The thing that's been interesting is that we were able to exceed our QBO goals with our desktop migrators being less than we had expected, less than we had built into the plan. The good news is these are more new to the franchise customers, and we still have those desktop customers that are still there to migrate whenever they're ready and come forward. It definitely has an impact on our revenue outlook from what we put together and shared a year, 18 months ago. Okay. Bulk of it's divestiture and some of it's from the mix. Yeah. Yep. Okay. Brad, over the last decade, we've watched you do a lot of acquisitions, and I think everyone gives you a lot of credit for effectively moving on and not trying to make do with some assets that may not fit in perfectly that maybe you originally thought were fitting in. I think it brings up a big question from the capital that you're putting into, as you mentioned, these half a dozen acquisitions. Has this changed your view on acquisitions at Intuit? Many of the larger ones have not gone well, and you've effectively vested those acquisitions. If you could maybe speak to how you believe you can fix that and what the strategy, and how the strategy's changed going forward. Yeah, Brent, I can. First of all, we've learned a lot of lessons, and I've learned a lot of lessons from our M&A track record, both during my time here as well as those that were done before us. We do a rigorous study of those, and we sit down with the board once a year, and we do a tenure look back. We compare those to the business cases we put together for the board as well as what we share with the Street. The pattern recognition's increasingly clear. We are pretty good, if not very good, at talent and technology tuck-ins and things that actually accelerate our time to market and our product lineup. They plug right into the ecosystem. We have a mixed record in terms of bolt-on businesses, new businesses that may not plug in directly with QuickBooks or the tax businesses. Those are the things that we've now got a new set of patterns that we've defined as principles. We're saying, if we're going to look in those spaces going forward, these are the criteria that these acquisitions have to meet. I would say we're a much more informed group. Of these six that we did last year, they totaled $120 million. The simple math is, the rough average is about $20 million apiece, so we're not big game hunters because we've learned from these acquisitions. If something came along that met the criteria that's informed from some of this pattern recognition I mentioned, we wouldn't be shy about leaning into it. We're just much smarter now about the things that we know we're pretty good at and the things we have work to do. Great. Thank you. Yeah, go ahead, Neil. I would just add onto that, though, too, that some of these businesses we're selling are great businesses and are doing well. They're not as tightly linked to the strategy, as we would like, and as we've considered ways to really accelerate doing the nation's taxes and being the operating system for small business success. Some things that are doing well and would do well on their own just weren't as accretive as part of this portfolio. Assets like QuickBase and Quicken, to be specific, were not acquisitions per se or not recent acquisitions and things that- Yeah are still performing well. Well said. Hey, Lachie. Thank you. Yes, sir. No, go ahead. Our next question comes from the line of Ross MacMillan of RBC. Your question please. Thanks for taking my question. Just a clarification, Neil, just so I'm clear on this. When we think about the fiscal 2016 guidance, and you comment on the disposal impact of $250 million on sales and $0.10 in non-GAAP EPS, are really those the only changes, fiscal 2016 versus fiscal 2015? There's no other incremental rev rec changes or anything else that could be going on here? Just wanted to make sure I'm clear on that. No, Ross, you're correct. Great. Brad, I know we've talked a lot here about leaning into the transition and in some ways, maybe trading off sort of near-term revenue for the unit opportunity and the ability to monetize these units over time. I was just curious, as you think about the customer lifetime value that you've talked about historically, you'll probably give us more at Investor Day, but, is there anything changing in your view on that lifetime value for the QuickBooks Online ecosystem? Or is your view that that's remaining pretty consistent with your prior view and what you're solving for effectively is the potential for higher units over time? Yeah, Ross, you're right. What we'll do is we are going to unpack this, and we're going to go down a couple of layers deeper in a few weeks here on September 17th, because it has a few pieces. What we want to do is do a breakdown and a use case of QuickBooks Online in the U.S., where you have the full ecosystem available, and we can show you what that lifetime value of a customer is. Then we'll share with you also the new QuickBooks Self-Employed and what the opportunities are there, as well as QuickBooks outside the U.S. and global markets. When you put all those three pieces together, that informs an average lifetime value. What you really get to see is a story of a new market, the story of a new segment, and a story of a more fully built-out ecosystem in the U.S. It gives you a reason to believe that we have real confidence in the lifetime value game plan we have for QuickBooks Online. We just want to take the time to unpack that for you and everyone else so you can see the same thing we do on September 17th. If you'll let us hold it off a couple of weeks, it'll be a lot easier to follow when you've got some material to look at while we talk to it. Understood. Just one last one from me. On Demandforce, as you reflect on, at the time, I thought that maybe was an acquisition that made a lot of sense, was a nice addition to at least a segment of your small business base. That business being disposed is not necessarily in keeping with being different because it's somewhat of a bolt-on. I'm just curious, as you reflect on that, what maybe didn't work in the way that you thought it might with that acquisition specifically? Ross. For us, the good news is the business has doubled since we bought it. It's grown. It's done well. It's had a good performance. Unfortunately, its performance wasn't benefited from being inside of Intuit in terms of customers from QuickBooks or some of the other ecosystem we're trying to build and fuel as one ecosystem. One of the challenges we had is product market fit. When we bought the business, it was targeted to the higher end of our QuickBooks customer base. It was a $300 a month subscription service, and there was a certain segment of vertical categories like spas and salons and automotive services, those kinds of appointment-based businesses that it really fit. It didn't fit the broad universe of QuickBooks customers, but we thought we could actually build a lighter-weight version, bring the price down, and be able to market it to our customers, where we saw about 400,000 lookalike prospects. Unfortunately, that hypothesis did not play out the way we thought. The customers did sign up for the service, but the retention rates were significantly lower than the more up-market customers, and the product fit was actually better for a larger business than the ones we were trying to sell to. One of the things we faced was, do we continue to put money into that business, or we continue to put money into growing QBO globally with payroll and payments and other services? We didn't want to starve a good business. We just decided it doesn't strategically fit with the QBO ecosystem. It's not getting real value from QuickBooks or vice versa. Let's put it in the hands of someone who will invest in this best-in-class product and let it grow and let us stay focused on our customer group. That's really what we learned from the Demandforce acquisition. Thanks, Brad. Appreciate the answers. Okay, thank you. Thank you. Our next question comes from the line of Raimo Lenschow of Barclays. Your question please. Thanks for taking my question. It's two, actually. First of all, obviously, we congratulate you on the progress on the QuickBooks Online subscriber growth, and the acceleration there. Can you talk a little bit about the online payroll subscriber growth there? That has been decelerating now for five, six quarters, and you talked about a higher attach rate, but how do I marry up these two figures? Can you talk a little bit about the puts and takes there, please? Yeah. I think there's a couple things, Raimo, and then I'll see if Neil wants to add anything to it. Our online payroll customer growth was 18% this quarter. The attach rate, as you said, is holding at 23%. We have a little bit of a grow over challenge. You may remember this time last year, we went from an opt-out to an opt-in in terms of the attach service. Last year when we rolled it out with QBO, it defaulted to having payroll on, and what we found was after 90 days, we had some retention issues. We had some people who said, "I didn't know I signed up for payroll," and they opted out. What we did is we went to an opt-in service where you have the ability to choose payroll, and we have a 23% attach rate, which is very healthy, but we also have a much more improved retention rate after the 30, 60, and 90-day mark. You got a little bit of an apples and oranges there, and that does impact a little bit of the year-over-year compare in terms of the growth. Beyond that, I'm not sure, what else would you have? One thing I also mention here, this is Matt. When you look at the online customers on our fact sheet, the majority of them actually are not connected to QuickBooks Online. Those that are attached to QuickBooks Online are growing really nicely, faster than what you see on the fact sheet. Through some of our other channels, through accountants and other third parties, there's online payroll solutions where you don't need to be attached to QuickBooks Online. That's part of the mix issue you're seeing there as well. Perfect. The second question I had was on the international businesses. Can you talk a little bit about the regional performances there? Obviously, there's lots of stuff going on in the world. I know you're not in China, but just kind of tell us a little bit more about what you see outside of the U.S. Yeah, Raimo, this is Brad. Happy to do that. Our Canada business is on fire. It's doing incredibly well, continues to accelerate in results, good, healthy ecosystem. Australia is also performing well, although off of a small base. As you know, we entered that market about a year and a half ago, and we're continuing to gain momentum there. The U.K. is also on a good, solid trajectory, and as we've added out some of the other services like the PaySuite acquisition, the payroll acquisition, it's on a good run. India is a less mature product offering for us. We're still building out what we call the last mile of compliance, and so it's performing okay, but it's not performing at the same levels of Canada, the U.K., or Australia for us. When you go beyond those, our two newer markets in the hopper is Brazil. We did an acquisition of a company called ZeroPaper. That is actually off to a pretty good start, early days, and we're getting it ported over to the QBO platform. We'll be opening up France. We're in beta right now. We'll be opening up France later in the calendar year, early part of next calendar year. We'll talk about it as well. Across the globe, those are the countries we're focused on right now. We don't have exposure to China or some of the other things that you're hearing about. We're seeing really good green shoots in each of these markets, and we still have some upside opportunities in France and Brazil once we get those opened up as well. Lovely. Thank you. Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your question please. Thanks. Good afternoon, guys. Brad, I heard you just a few minutes ago talk about good retention, 30, 60, 90 days. That was in the attach category. I'm curious, as the QuickBooks Online customers, and I guess this is U.S., you can answer it more broadly, as they reach their free period sign-up and then retention thereafter, I'm just curious if you can provide any metrics or commentary with regard to what you're seeing at that point. Thanks. Yeah. We've shared that our QBO retention number is in the high 70s. Interestingly enough, that's consistent with what we also saw with QuickBooks Desktop. We would also tell you that we see some opportunities to continue to improve retention, because now we have the ability to see the user behavior and have the opportunity to reach out to a customer if we haven't seen them log in or if we see them stumbling over a certain part of the product. We think that number can get even stronger as we look ahead. Right now, it's in that mid to high 70s in terms of the retention rate for QBO. Okay, great. Thanks on that. Just wanted to clarify. Neil, looking at next year, it looks like with regard to our model, at least, a little bit lower share count, obviously a little bit on the revenue line. There's a difference on the path to the $5 guidance in fiscal 2017, or at least as we're bridging on our way there. Could you speak a little bit to the margin profile you see? We can obviously see what it is in fiscal 2016, and as we move on to 2017, puts and takes there, Neil. Are there any cost savings initiatives undergoing that we might need to be aware of? Well, there are several things, Scott, to be aware of. Obviously, we've talked about the divestiture significantly. This also goes back to an initiative that really began during the spring, of really looking at all of our discretionary expenses, to make sure that they're aligned against the things that are most accretive to growth. This includes all of the R&D initiatives, marketing initiatives, and things like that. It's not necessarily just moving them from one product or from one business unit to the other, but also really measuring the effectiveness. Someone asked about our LTV to CAC process earlier, I can just tell you that we continue to refine and improve, not only looking at the lifetime value of customers, but also segmenting the dollars we spend against those and learning which channels and which approaches are most cost-effective in doing that. There's nothing specific that I would talk about at this point, you should just know that across the company, there's a lot of focus on making sure that all of our investments are focused and concentrated in areas that are really driving customer growth and monetization of the customers we already have. Great. Thanks, Neil. Just to clarify, a quick one. On Pro Tax, you guys delivered upon what you said you would this year. Relative to my model, it looks a little light in the next year. Is that maybe just my model, or is there something that has changed relative to your expectation in some of the carry-through from fiscal 2016 to 2017? Thanks. Scott, there's nothing that I'm thinking of that's changed. If you take the revenue push out of 2015 into 2016 that we've been talking about, ought to get you pretty close. No fundamental changes in the business that would throw you off substantially. Excellent. Thanks for the clarification. Thank you. Our next question comes from Kash Rangan of Merrill Lynch. Your line is open. Hi, Kash. This is Scott on for Kash. I just wanted to ask about if you can provide some detail on the international QBO, the percentage of the QBO subscribers from international, and if there's any comment on the attach rates for the payroll and payments, if that difference from the U.S. versus other regions. Thanks. Okay. It's international for us. We are growing right now. We have 198,000 paid subs. That's up about 135% over this time last year. It's primarily coming from the four markets that I mentioned a couple of minutes ago, Canada, the U.K., Australia, and India, because we're still very early days in Brazil and France. The attach rates right now, we don't really have a fully built-out ecosystem beyond Canada. Canada has payroll and some payments. The U.K., we just made an acquisition of a payroll company, and we're attaching there. In Australia, it's with a partner that we actually work with. We have a mix of the ecosystem being built out in those other countries. The attach rates we often refer to are U.S.-based. We don't yet provide attach rates beyond the U.S. because we're still early days of building out those razor blades to attach to the razors. I don't know if that gave you what you were looking for, but that's sort of an overview of the international markets and how it compares to the U.S. Okay, thanks. All right. Thank you. Our next question comes from the line of Kartik Mehta of Northcoast Research. Your question, please. Yeah, good afternoon. Neil, I think in the prepared remarks, you talked a little bit about margins for the tax business. I thought you had said you're not anticipating much margin expansion. I don't know if you're expecting any, is that a reflection of any type of change in competition you're anticipating, change in strategy or new product, or is that just a reflection of you're trying to get customers and right now that's where you're investing? Yeah, Kartik, it's definitely the latter. The margins are quite healthy in our consumer tax business and professional tax, for that matter. We're constantly challenging ourselves to find ways to accelerate the category growth and our share within the category. Just a reminder or just a heads-up to everyone that we're always focused on trying to grow customers faster than revenue. For businesses with those type margins, we're always looking to expand the category, and we'd be willing to take some, be in the low end of the 60s for consumer tax, for example, if we had some great ideas to really expand the category and accelerate our growth there. Brad, I just wanted to get your thoughts after the divestiture you announced, where you stand in terms of your Mint product and maybe even the recent acquisition of Check. Yeah, Kartik, I'm glad you asked. If you look at the fact sheet, and you heard Neil allude to this in the opening comments, we're reporting this consumer ecosystem, which is now inclusive of Mint Bills, which is the new brand name for Check, and of course, our OFX capabilities, which basically downloads financial information from banks into all of our products, including QuickBooks Online. The reason why we're reporting it in the small business segment is because we believe this business has the potential to create a network effect. In a headline today, small businesses send out over 1 billion invoices using QuickBooks a year. They get paid typically with a paper check in an envelope 48 days later, and one of their top 3 pain points is improving their cash flow. We've talked to you the last couple of years about this concept called an Intuit Commerce Network. Well, we've been running experiments with Check and Mint, where we believe now that we can solve the consumer side so that they can use a mobile phone and easily pay their small business, who will send them an electronic invoice in a matter of days. It's a delightful experience for the consumer. It obviously gets the small business paid right now on average in less than 10 days, which is significantly better than the 48 days. We started to see enough excitement there that that's why we actually shut down all the other Check channels and said, "Let's put all of our energy just into QBO." We've kept Mint in check because we think it solves an important problem for consumers, but most importantly, because it also connects with the rest of the Intuit ecosystem, and we think we have the potential for a two-sided problem that could be a network effect if it plays out the way we hope it will. Just last question, Brad. You talked about the payroll online business and some of the success you're having there. Are you seeing any change in competition and how they're pricing their product based on some of the success you've had? Craig, it's always a tale of multiple cities here. You've got some of the traditional players that were outsourced players who've added internet and web-based versions of their products out in the market. We haven't seen a lot of change in their competition. We've seen more advertising, which is actually good for the category, because the more people who talk about the alternative solutions that use software, the more our business grows. There are new startups, you've heard some of them, good companies like ZenPayroll. Square recently announced that they were moving into the payroll business. Everyone's bringing innovation to the table, but there really hasn't been anything that's materially different. It's just everyone continuing to make it easier for small businesses to pay their employees and to be able to get back to doing what they love, which is actually running their business. Thank you very much. Appreciate it. Okay. Thank you. Our next question comes from Keith Weiss of Morgan Stanley. Your question please. Hi, this is Sanjit for Keith. A couple questions. First, on the level of discounting and promotions. I appreciate the guidance of growing customers faster than revenue, relative to maybe fiscal year 2014 and this past fiscal year, are we looking for similar levels of promotional activity, or we're looking to take it to another level in 2016? As you might imagine, we run lots of pricing experiments and test sells to figure out where's the best place to promote our price or promote our product and get the most unit lift. We run everything from 90-day sort of try before you buy to 20%-40% off over the first six months. We've gone all the way as far as offering free services for an extended period of time. I think that's informed our go-forward plan. We obviously aren't announcing that right now because competition reasons, we don't want to let everybody know what our pricing is. I would tell you that we have done a lot of tests, and we feel pretty good about not only the desktop learning we got in the fourth quarter, what is the promotional floor, but on the cloud, in QBO, as well as our other products, what's the right sort of promotional offers to get the maximum customers to come in and actually get those customers to convert versus simply kicking the tires. I'd rather not share anything beyond that right now, just because we want to wait till we get into fiscal year 2016, and we'll actually have our pricing out on the website once we do that. That makes sense. Looking forward to, this has been discussed before, attach rates on payroll and payments. I realize the reset that we had in the beginning of this year, what type of attach rates could we get in terms of the level of improvement that makes sense? I think I said about 27% or 29% last year before the reset. In terms of the level of improvement, what makes sense as we think through fiscal year 2017? Is it 100 basis points a year? Would that be conservative enough, or what would the drivers be for that improvement? I can start with what the total addressable opportunity is. About half of small businesses accept a credit card to date, I'd like to say that 50% would be the target that we ought to be challenging ourselves to get to in payments. To be fair, we've gone from four to six to nine to 11, it's going to be a while to get there, I think our general manager would probably look us in the eye and say, "Wow, 50%, that's like 100% of the market." Our answer would be absolutely, because that's the mindset we ought to have. We ought to have the best solution that solves the customer problem better than anyone else, we ought to be able to win those customers, especially if they're using QuickBooks. The same thing would go for payroll. Right now, we know about half of the payroll customers today have employees that are W2 employees. You could say 50% would be a good penetration number for that. I think the payroll general manager would say the same thing to us, I think our mindset needs to be, we ought to have the best payroll and payment solution, especially for a QuickBooks customer. If they're paying employees or accepting credit cards, they should be using our service. A lot of headroom to go from 23 to 50 in terms of payroll or from 11 to 50 in payments. I'm not sitting here telling you that we have a game plan to get there in the next three years, we have a mindset that says we ought to be trying to win every single customer. Appreciate the answer, Brad. Thanks. Okay. Thank you. Our next question comes from Gil Luria of Wedbush Securities. Your line is open. Hi, this is Aaron on for Gil. When you look at your QBO customers, specifically the ones that are new to the QuickBooks platform, how are they performing? Are they performing more or less than you expected? How's the yield on those? Aaron, I would say that if you look at the software component, it's performing very much in line with what we expected and what we would like to see at this point. The but on that is relates to attached services, payroll, and payments. We've talked about a lot of that already. We just don't have those capabilities outside the U.S. that we have here. If you look at the software itself and the effective rates on that, it's very much in line with what we expected. Great. Thank you. Thank you. Our next question comes from the line of Jim Macdonald of First Analysis. Your question, please. Good afternoon, guys. Looking at the QuickBooks Desktop attach for payroll and payments, for kind of the first time, it seems like those are starting to decline. Can you talk about that? I know you're pushing QBO, but I would've thought that those customers would either show back up in QBO or be maybe the last ones to go away. Yeah, Jim. It's Brad. First of all, those customers are staying with us. That's good news. What we are seeing in the attached services is a combination of two things. Historically, we would sell about 600,000 new QuickBooks Desktop customers a year. That number is now about half of that. What you find out in terms of attached services is many of those decisions get made in the first 90 days, whether they're going to sign up for payroll and payments. One of the things you will see is the attach rate on Desktop is getting affected by the fact that not as many new Desktop customers are coming in because more are choosing the cloud. The second is, in the case of payments, we do have some customers that are large customers that have made some payments decisions outside the QuickBooks ecosystem. That's a little bit of an effect we're seeing on payments. By and large, we see still an opportunity to continue to get attached services in Desktop, and that's one of the opportunities we're pushing ourselves to be better at as we look ahead. We aren't losing the customers. In fact, one of the things that we had counted on that didn't happen this year is about 80,000 of the Desktop customers that we thought would migrate to the cloud, 80,000 fewer actually did that. They actually stayed on Desktop. We can see them in the franchise. We see them using our services and our opportunities to continue to market to them, to get them to either move to the cloud or to use additional products. We see it as an opportunity that's not yet capitalized on. Moving over to TurboTax, I know you don't want to talk about the core, but you did mention the fraud issues. Any ideas of what's going to be done next year and how effective it will be in terms of solving this big problem? Yeah, Jim. I can say, first of all, I've never seen such coordinated collaboration between the federal government, the state governments, and the collective industry as a whole. I've been in Washington multiple times. We've all sat at the table, the heads of all the different companies, and we have a coalition. Our coalition is formed against one common enemy, which is the cybercriminals. Our collective goal is to get tax fraud out of the U.S. tax system, and we've agreed to a set of standards, some data protocols, and a frequency of information sharing so that we can collectively get this U.S. tax system safe, and people hopefully will continue to feel good about their ability to file their taxes. None of us, at this point, are wanting to share much more detail than that because we don't want to give any tips to the cybercriminals. We do know that we have a big step forward, but it's one year of a multi-year journey. We're going to remain vigilant on this and continue to push on it year after year until we see zero in the U.S. tax system. Great. Thanks. Okay. Thank you. Our next question comes from the line of Nandan Amladi of Deutsche Bank. Your line is open. Hi. Good afternoon. Thanks for taking my question. To get to the 2 million QBO subs, obviously there's going to be a mix of people who are new to the franchise and migrating desktop customers. You made a comment earlier about 80% of the new subscribers are new to this franchise. What mix assumption are you making to get to that 2 million number? Has that assumption changed, as you've seen, at least this quarter, fewer desktop users migrate? Yeah. I can say that when we originally had anticipated getting to 2 million subs, we provided that as a guidepost to help us think about our shift to the cloud, we had more customers that we anticipated migrating from desktop and less customers that were new to the franchise. This year, we had anticipated about 80,000 more desktop customers to migrate, and they didn't. The good news is, more new to the franchise came in, which expanded the category, we raised our guidance on subscriber growth and exceeded that revised guidance. Right now, we can maintain the mix we have, which is more than 80% being new and less than 20% being migrators, and we still feel confident, as Neil articulated in his opening comments, in that 2 million subscriber target we put out there for fiscal year 2017. We don't need to change the mix. If the mix changes, we only see that as upside. Right. The desktop users that are not migrating, do you have a sense of why they're not migrating? Is it feature parity, which I know was an issue about a year ago, or are there other factors? It's a combination of three things. One is features. About two-thirds of the customers could migrate today. We still have a product roadmap that'll get deeper inventory capability built out in the fall. In the early part of the calendar year, we'll have some features like job costing built in and the ability to migrate payroll data. That will appease some of those customers. There's another group of customers that, quite frankly, just are locked into inertia. They've used desktop for many, many years. They don't feel the need to move. They like the QuickBooks product. They're satisfied with it. As long as they're happy, we're happy. The third is the accountants. The accountants are increasingly adopting QuickBooks Online and using it. As they get more comfortable, then they will start to recommend it to small businesses. Some of those accountants today are still test driving the cloud, and they use desktop products to do tax returns and other things. Until they get motivated and excited, and we have to have a compelling reason for them to be excited, many of those small business customers won't move until their accountant tells them to. It's those three pieces. It's features, it's the small business inertia, and it's the accountant recommending and suggesting they should move over to QuickBooks, we're working all three of those angles. Thank you. Thank you. Our next question comes from the line of Brad Reback of Stifel. Your line is open. Great. Thanks very much. Can you address why you didn't buy back any stock in the quarter? Yeah, I'll take that one. Thanks for asking. We were locked out of open market purchases for most of Q4 because we were talking about these asset transactions and thinking about what to do with those. We had a 10b5-1 in place. We have a 10b5-1 in place. When I put it in place back much earlier in the year, I was a little too conservative with my grid that I put in place, so we were kind of locked out on that end, too. We won't make that mistake again, and we regret not being in the market much more aggressively in Q4. We kind of got some mechanical issues that tangled us up. Great. Just one quick follow-up. Since you didn't write down any of the assets you're selling today, does that imply that you shouldn't take a loss on any of them? What that implies is that we've applied the accounting treatment at the end of this year, and we've looked at our book value against a range of outcomes that we've developed in our relationship with the people helping us market the assets. Yes, for book purposes, you should assume that. Great. Thanks very much. You're welcome. Thank you. I'm not showing any further questions. Would you like to close with any additional remarks? Yeah, Latif, I would. First of all, I want to thank everybody for your questions today. I know we shared a lot of information. If you take anything away from today's call, I hope we successfully demonstrated three things. That we're exiting this fiscal year in a position of strength, and we have very strong momentum. That we are laser-focused on accelerating to the cloud in support of our two strategic goals. That we have proven reasons to believe that we can effectively deliver in large and growing addressable markets, whether they're in the U.S. or outside the U.S. Again, we're looking forward to spending a little more time with you and continuing the dialogue and sharing a little more information at our Investor Day on September 17th. Until then, we hope everybody has a good remainder of the summer. Ladies and gentlemen, thank you for participating. This concludes today's conference call.