Good afternoon. My name is Saiid, and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit's Third Quarter Fiscal 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period.
With that, now I would like to turn the call over to Matt Rhodes, Intuit's Vice President of Investor Relations. Mr. Rhodes, you may begin.
Thank you, sir. Good afternoon, everyone, and welcome to Intuit's Q3 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 ks for fiscal 2014 and our other SEC filings. All of
those documents are available
on the are available on the Investor Relations page of Intuit's website at intuit.com. We assume no obligation to update any forward looking statement. Some of the numbers in this report are presented on a non GAAP basis. We've reconciled the comparable GAAP and non GAAP numbers in today's press release. Unless otherwise noted, all growth rates refer to the current period versus the comparable prior year period and the business metrics and associated growth rates refer to worldwide business metrics.
A copy of our prepared remarks and supplemental financial information will be available on our website after this call ends. And with that, I'll turn the call over to Brad Smith.
All right. Thank you, Matt, and thanks to all of you for joining us. First, the headlines. Today, we reported 3rd quarter revenue of $2,200,000,000 This was above our guidance range and as a result, we increased our full year revenue guidance. Non GAAP operating income and earnings per share were also above guidance.
QuickBooks Online subscribers once again exceeded expectations, so we've raised our outlook there for the fiscal year as well. Our GAAP results include the impact of a strategic refocus in consumer ecosystem group, which Neil will discuss in a moment. Now I know tax season is on everyone's mind, so let me start there. I feel very good about our performance in our tax businesses. In the U.
S. Season to date, TurboTax Online units grew 13% and total TurboTax units grew 9% excluding the Free File Alliance. As a result, we now expect consumer We're in the 2nd year of a multi year journey to deliver our strategic goal of taxes are done. Our objective this year were to drive growth in the do it yourself software category, to increase our customer base and to expand our market share. We succeeded on all fronts.
As we shared in previous discussions, there are 4 main growth drivers for TurboTax. Let me walk through each of these and highlight how we performed versus our expectations. The first driver is the total number of returns filed with the IRS each year. Total returns received by the IRS were up about 1 percent in line with our expectations. The second driver is the growth of the do it yourself software category and the category share of the total IRS returns filed.
This season, the do it yourself software category gained more than a point of share from alternative methods, which was a little better than we had forecasted. As the category champion, it is our responsibility to help fuel the secular shift towards software that's been occurring for the past decade and we succeeded. IRS data shows that the do it yourself e files were up 6%, contrasted with assisted e files, which were roughly flat. Over the past 2 years, the do it yourself software category has gained 3 points a share from the assisted PAX Prep methods. The 3rd driver is expanding our share within the do it yourself software category.
This season driven by the improvements in our TurboTax product and more efficient and effective marketing, estimate that TurboTax Online gained about a 0.5 of share, which translates into 4 points of share gains over the past 2 seasons. While our Absolute Zero program helped drive share gains early in the season, the payoff on our multi year product innovation has the greatest impact as demonstrated by big improvements in Net Promoter Score, conversion and retention. And finally, the 4th driver is the monetization of those returns. Our share gains were not simply the result of aggressive promotions. The reality is that we delivered revenue above our guidance range even as we achieved our goal of growing our customer base faster than revenue.
This was driven by stronger product mix, improved attach rates and a new bundle. Our efforts to reinvent the tax prep category are clearly paying off. TurboTax's mobile enabled customers to start and finish their return on any device for the first time. Total mobile app downloads were up almost 70 percent year over year and the ability to finish on any device more than doubled conversion for those that started out on a mobile device. Our investment in the offering also led to a 30% decrease in overall customer support contacts throughout the season.
During the heaviest call days at the very end of season, we decreased our support abandonment rate by 80%. These durable innovations, which have been developed over several years are not easily matched by competition. And they've improved TurboTax Online's conversion by nearly 300 basis points this year and improved TurboTax Online's Net Promoter Score by 5 points as well. Now we learned a lot this tax season and we demonstrated an ability to adapt quickly to the constantly We're committed to leading the industry's fraud protection efforts and to earning the trust of our customers every single day. On the ProTac side of the business, total customers also grew, while the overall Pro category was roughly flat.
This segment is on track to come in at the high end of its guidance range as well. With that overview on tax, let me now shift to small business. The QuickBooks Online ecosystem continues to build momentum. We grew total QuickBooks Online subscribers by 55% in the 3rd quarter, up from 50% in the previous quarter. This represents the 8th consecutive quarter of accelerating paid subscriber growth.
We added more than 120,000 QuickBooks Online subscribers in the quarter and we now have 965,000 paying subscribers worldwide. In the U. S, QuickBooks Online subscriber growth accelerated, growing 45% in the quarter, up from 39% in the previous quarter. Our new customer payroll attach rate in the U. S.
Improved versus last quarter to 23%. And our QuickBooks Online payments attach rate of 9% is up from 8% a year ago. Roughly 15,000 of our QuickBooks Online subscribers are using the QuickBooks Self Employed solution. That's up from 5,000 subscribers just 90 days ago. And about a third of those customers chose the bundle that includes TurboTax Home and Business.
Finally, outside the U. S, QuickBooks Online subscribers were up about 140% to just over 150,000 paid subs. So to put a bubble around the year, in tax we successfully navigated a challenging season, growing the category, gaining market share and improving monetization efforts, all resulting from a multiyear effort in pursuit of our strategic goal of taxes are done. And our small business online ecosystem continues to build momentum with QuickBooks Online subscriber growth accelerating. So with that overview, let me turn it over to Neil to walk you through the financial details.
Thank you, Brad. We'll start with overall company results. For the Q3 of fiscal 2015, we delivered revenue of $2,200,000,000 non GAAP operating income of $1,200,000,000 GAAP operating income of $906,000,000 non GAAP earnings per share of $2.85 and GAAP earnings per share of 1.78 dollars These results factor in our strategic decision to deliver ongoing services and releases for future desktop offerings to encourage migration to online solutions. As a result, revenue for future desktop software licenses will be recognized as services are delivered rather than upfront. Our GAAP results include a goodwill impairment charge for our consumer ecosystem group.
Our revenue and operating income
for this group have trailed
our expectations for the year. As a result, we initiated a strategic shift in the 3rd quarter to increase our focus on integrating our bill pay solution into Mint and Quicken. Accelerating this capability was the primary reason for result, we're writing off approximately $263,000,000 in goodwill, primarily associated with these channels. This charge reduced Q3 GAAP earnings per share by $0.93 Turning to the business segments. Total small business group revenue declined 5% for the 3rd quarter, primarily due to the impact of changes to the QuickBooks Desktop product, resulting in ratable revenue recognition.
QuickBooks total paying customers grew 20% in the 3rd quarter and are up about 8% year to date. Small Business Online Ecosystem revenue grew 20% and customer acquisition in our online ecosystem continues to drive growth. QuickBooks Online subscribers grew 55%, accelerating from last quarter. Online active payments customers grew 6% and online payments charge volume grew 19%, driven by an increase in charge volume per customer. Online payroll customers grew 20%.
Switching to desktop. Total desktop ecosystem revenue declined 15% as expected. QuickBooks desktop units declined 23% in the 3rd quarter 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. Desktop active payments customers declined 11% and desktop payments charge volume declined 1%.
In the 3rd quarter, we sold non core payments assets, which had generated roughly $20,000,000 in annual revenue. The goal of this transaction was to further focus on our core opportunities in the payment space, attached to QuickBooks Online and e invoicing across our ecosystem of more than 4,000,000 small businesses. We recorded a gain on the sale lease assets of $30,000,000 in the 3rd quarter. Within the consumer group, consumer tax revenue was up 4% versus the Q3 last year and up 9% year to date, as we benefited from a higher than expected mix of paid units and revenue from attached services. Free upgrades, rebates and higher attrition for customers affected by our desktop product changes reduced revenue by approximately $20,000,000 We also incurred an additional $15,000,000 in expenses related to servicing customers impacted by the TurboTax desktop lineup change and to increased investment in data and security features.
We'll continue to invest in this area to ensure our customers' privacy and security. Pro tax revenue was $130,000,000 down 61%. As we previously discussed, we expect a revenue shift of $150,000,000 from fiscal 2015 to 2016 due to changes in our desktop offerings. The fundamentals of this business remain strong and we expect full year revenue to be near the high end of our guidance range. We continue to take a disciplined approach to capital management, investing the cash we generate and opportunities that yield a return on investment greater than 15%.
With approximately $2,100,000,000 in cash and investments on our balance sheet, our first priority is investing for customer growth. We also look for inorganic opportunities. And in the Q3, we made 2 acquisitions totaling approximately $30,000,000 When is the best use of cash? We'll return cash to shareholders via share repurchases. Year to date, we have repurchased $1,250,000,000 of shares at an average price of about $90 including $568,000,000 of shares in the 3rd quarter.
The Board approved an additional $2,000,000,000 in share buyback authorization. We now have about $2,600,000,000 remaining on our authorization and we intend to be in the market each quarter. Our Board also approved a $0.25 dividend per share for our fiscal Q4 payable on July 20. This represents a 32% increase versus last year and reflects our large and growing cash position as well as more recurring and predictable revenue streams. We raised our revenue guidance for the full year and we maintained our operating income guidance despite can find our guidance details in our press release and on the fact sheet.
And with that, I'll turn it back to Brad to close. All right. Thank you, Neil.
We're pleased with our strong finish to the tax season. We grew the digital category, increased share and plan to come in above the high end of our revenue guidance range in consumer tax. As we continue to reimagine the tax preparation experience, we are already working on the product for next season. And we will remain at the forefront in the ongoing fight against fraud, working with our peers and government momentum side, it continues to build and ramp up. And as a result, our transition to the cloud is accelerating, driving value for customers and for Intuit.
So with that, let's open it up to you to hear what's on your mind. Saiid?
Thank Our first question comes from Walter Pritchard from Citi. Your line is open. Please go ahead.
Hi, thanks. Two small business related questions. First, I saw you bumped up the guide for the year. You didn't comment on the 2,000,000 dollars number for fiscal 2017 ending. I'm wondering just given the outperformance here the pace of which you're adding subs, how should we be thinking about that $2,000,000 number that you're thinking out in 2017?
Hi, Walter, it's Brett. First of all, we've raised the guidance a couple times this year. So clearly, the question is on target. We continue to outpace our forecast. At the same time, what we want to do is we want to close out this fiscal year and then pull up the news of the plane and we'll take a look at our guidance for fiscal year 2016 August as well as our outlook for 2017.
At this point in time, we're not changing the outlook, but we clearly have pattern here of continuing to perform well. So we'll talk to you more about that when we set guidance for 2016 and then talk to you at Investor Day in the fall.
And then Brad just kind of related to that. So I think this fall you're going to release your QuickBooks Desktop product again like you do every year, except this year there's really my understanding is there's really not going to be any new features in the product or substantially all of your feature development is on the product. And now that you're getting closer to that and sort of maybe playing with how customers may behave around that, how should we think that impacts the growth rate of online given they'll go to the store and they'll see a new product, but there's really not a whole lot new in that desktop product while all the new features are in the online?
Yes. So first of all, the statement that's on target. We are leaning our new R and D and features into QuickBooks Online. At the same time, we remain committed to having a delightful product experience for desktop customers. We still have 3,700,000 customers using that product.
And while we do see some that are willing to migrate to the cloud, we want to keep those customers who stay on desktop delighted. We haven't talked about what features we'll put in there. The one thing we are continuing to do is improve the product experience, so they do things more efficiently and effectively. So there will be changes in the product that will continue to come out in the fall, but we will be leaning more heavily into the new features in QuickBooks Online. What that turns into in terms of an outlook is we anticipate as you can tell from our subscriber forecast that you're going to see more new customers coming in to QuickBooks Online.
In fact, right now, over 60% of all the new customers are now selecting the cloud version versus desktop. And it was just a few quarters ago, we hit fifty-fifty. So we see that continuing. And we expect desktop units will probably continue to climb at 20% to 25%. And so those are sort of the outlooks we provided so far.
Great. Thanks, Brad.
You're welcome. Thank you.
You. Our next question comes from Brent Thill from UBS. Your line is open. Please go ahead.
Good afternoon. Brad, just on the international build out of the small business. I'm just curious if
you could bring us up
to speed in terms of what you're seeing there and the traction. And if you could also comment, I think you have obviously a very big installed base on the desktop side. And I think you've been pretty clear that a lot of the net new users to QuickBooks have come from new users rather than the install base. Are you starting to see that installed base move over? And when you look at that $2,000,000 number, how much is predicated on those installed base customers moving over?
Thank you.
Okay. You're welcome, Brent. So let me start with the global view. We continue to be encouraged by our global progress. We just announced that it was up again 140%.
We have about 150,000 paid subs. On a country by country basis, the story is slightly different. There's real strength and momentum in Canada. There's a continuing acceleration in Australia as well as the United Kingdom. We have had some challenges with monetization efforts in India, but it's a very small portion of our base and we treat that as an experimentation market because we truly are the only cloud based player there.
So we're learning more in the India market, but we're getting good subs. We're just trying to find different ways to make sure that we're bundling that with the right products for accountants. And of course, we just recently announced an acquisition in Brazil as well as opening up in France. And so as we head into the fall, we'll have a better read on how those two countries are performing. But so far, we like how the product is shaping up and we like the reception in the market.
So the global story is strong. When you think about the desktop and then the new users and the migration that you're asking about for QBO, right now about 8 out of 10 of the QuickBooks Online customers are new to the franchise. And that's pretty consistent over the last several quarters. The migration is not as much as we had originally forecasted, but still up over 60%. And so it's a good healthy migration number.
But our goal right now is to make sure we have the right feature functionality in the online version. So for those who want to migrate, we have that. And we think we'll have both of that gap close in this late summer timeframe. The second thing we want to make sure we do is that we have the data conversion and the assistance they may need up and running and we have that in place now. And then the third thing is just make sure that they feel like it's a good price value and we feel today that getting good feedback on that.
After that, it's up to them being comfortable. And if their accountant helps them make that jump, then I think we'll make the move. If not, we're going to keep them happy on desktop, because if they don't want to leave the desktop products to go to our own cloud solution, we don't see them leading to a competitor either and we want to keep them in the franchise. So that's sort of how we're looking at migrations right now. 8 out of 10 of the users in QBO are new to the franchise.
The other 20% are actually migrating from desktop. That's a pretty consistent ratio, but we are seeing the migration numbers going up about 60%, but it's still not as big as we had originally forecast and we're fine with that. Great.
Thank you.
Thank you. Our next question comes from Ross MacKinnon from RBC. Your line is open. Please go ahead.
Well, thanks. Brad or Neil, I was just curious, you commented that total QuickBooks users were up I think 20%. But if I look at on a unit basis and I think about what percentage you're actually capturing from conversion, it still looks like the overall desktop units are falling a little bit faster than I would expected. And I noticed you did some promotions I think in April to try to I presume convert some of the traditional QuickBooks desktop customer to buy Afresh.
I was just curious as
to kind of what your thoughts are there with respect to if you will, capturing those desktop customers that are clearly tracking a little bit sort of lower than we typically see in terms of purchasing on that 3 year cadence?
Hi, Ross. This is Neil. You're exactly right. We have been other hand, we don't see those desktop customers going anywhere else either. So as you the other hand, we don't see those desktop customers going anywhere else either.
So as you know, for those who have used our products, they can choose when they want to upgrade and when they choose to do that. We've tested different price points throughout this year to determine if we can influence what we call eager upgraders. Those people who upgraded a desktop solution more frequently than every 3 years 36 months. And we've seen some encouraging signs more recently. But to the broader point as we've said all along, we expect the desktop units to decline around 20%, 25% per year.
And so what we've seen so far has been pretty well within our expectations and guidance. We just haven't seen as many convert over to QBO yet as we would have expected. So we're testing some different price points. As Brad said, we want to be sure that customers who are using QuickBooks, whether they're using desktop or online are using the absolute best product, the best solution and then we make it easy for them to make that choice and to get into product.
Yes. And Ross, this is Brad. If I could just add a quick point and builds on the answer I gave to Brent a couple of minutes ago as well. This is really a good new story for us. For many years, we sat in front of you and talked about 4,000,000 installed users on Quick Books and every time we had a quarter, we would say, well, why aren't we growing that base?
We're growing the base now because QuickBooks Online is expanding the total addressable market. So we've raised guidance on QuickBooks Online units twice this year and that's even with the migration from the desktop not happening at the pace we thought. And that's because 8 out of 10 of these people never used software before and they're coming into the category. That is good news. The second piece of good news for us is the lifetime value is a wash.
So the lifetime value on desktop was $1400 and for QBO right now it's $1400 And so as long as we keep the customers happy on desktop and then get the features built out in QuickBooks Online and then help them make that migration on their timeframe, it's a win win for us. So we aren't sitting awake at night worried about the desktop customers not moving. We're committed to getting them to the cloud, but we want to do it on their time frame, so we don't send them off to a competitor. And we're feeling pretty good about how it's playing out so
far. Thanks. And maybe just
a follow-up. Neil, you said you and both of you probably are seeing this that you know that those I think to how you actually or is it survey work? How do you know they're not going anywhere else?
The main thing that I rely on, Ross, is just our own communication with those customers, survey data, input we get through our call center and through our care support agents is what leads me to feel comfortable about that.
That's great. Thanks a lot.
Thank you. Our next question comes from Kash Rangan from Merrill Lynch. Your line is open. Please go ahead.
Hi. Nice quarter guys. First on the TurboTax retention which improved by 3 percentage points. What helped you? And how sustainable is the space of improvement?
And on the small business side, Brad, I think you mentioned the lifetime value of 1400, 1400. What are the attach rate assumptions you're using to generate that lifetime value as far as payments and payroll are concerned? And if those attach rates were to move higher in the future, I would assume that you have more aggressive targets, how much would the lifetime value expand? That's it. Thank you.
All right. Ash, thank you. Well, let me start with retention first. I mentioned that this is the 2nd year of a multi year effort where our team has been going in behind the division of taxes are done. So finding access to data, so customers could actually import their W-two electronically.
You may remember last quarter we talked about a third of the customers last year could do that. This year over 3 fourths of them could, over 75% could. And we've seen that if they have any data already inputting their tax return, it increases conversion. And then if they have a great experience this year, that increases retention next year. And the best leading indicator on retention is an improvement in Net Promoter Score and it went up 5 points this year.
So we feel very good that because of the products being more customized to your particular tax situation and we're having you do less work because we're able to import data electronically that we're able to basically continue to improve conversion and retention. That's really what's driving TurboTax. And we'll break more of that down when we get to Investor Day in the fall. The second is on the lifetime value and I'll go back to Investor Day again. We put a slide into this past September and it really has all the assumptions laid out in there for the lifetime value of desktop versus online.
I think at the summary level, what we've put in there as a forecast is today desktop is less reliance on the accounting price and more on the payroll and the payments because it's got a heavier penetration of those attached services. QBO today is less mature that way. So it's actually heavier on the accounting subscription every month and a little lower on payroll and payments. But as you just suggested, every new customer we bring in is attaching at a higher rate. And so we think that's improving we see that improving over time in an absolute basis.
The only thing that will work against that is that we're starting to move into new countries, where we don't have payroll and payments yet available. So that will bring the mix down a little bit on the average. And then we're also introducing QuickBooks Self Employed, which are small sole proprietors who don't have employees, so they won't have payroll. So on an absolute apples to apples basis, we see the lifetime value of QuickBooks Online with the payments and payroll attach rates getting stronger improving. But when you put it in the mix of those global units as well as QuickBooks Self Employed that will be a headwind we'll work against, but ultimately that will pay off over time as well.
And there's a lot more detail in that particular presentation in September if you want to pull it down, but I hope that hits the high level for you.
Absolutely, it does. And just as a follow-up with the how is the transition from the opt out to opt in coming along? And are the attrition characteristics shaping up the way you expected after you made this change? Thank you.
Yes. I believe you're referring to our payroll change where a few quarters ago, yes, absolutely cash. It is paying off. So what's happened now is the retention rates in the cohorts to the customers that are with the 30, 60 90 days are improving. And so what had happened is we had people default into payroll, people found out after a couple of bills that they were getting charged for payroll and they didn't want it.
They were frustrated and it caused our attrition to spike. Since we switched to an opt out, the right customers are now selecting payroll and we've seen an improvement in our retention, which you know is one of the biggest levers you have in a recurring revenue service. So it's paying off the way we want and that's reflected in the growth rate we had in payroll this quarter.
Wonderful. Thank you. You're welcome. Thank you.
Thank you. Our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.
Yes. Thanks. Hi, guys. On the QuickBooks Online, I caught the data migration comment, but did you update in terms of where you are on the advanced inventory modules that you thought would help with conversions from desktop to online?
Hi, Sterling. I didn't call it out specifically. I referenced other features. But just to be specific about the advanced features, we did an acquisition of a small company called Lettuce and that brings advanced inventory capabilities that pretty much gets us to parity with QuickBooks Pro on the desktop. Our current timeline is to have those fully implemented in the late summer timeframe and then begin to have more of a conversion focus for those desktop customers in the Q1 of fiscal year 2016, so in the fall.
Okay, great. And on the consumer tax side, now that looking back at the customers that you brought on, so the new customers, especially at the low end, is there any sense of how we should think about those migrating up to being higher ARPU paying customers next year and the year after that?
Yes. I'll give you a 2 part answer on that one Sterling. If you go back to when we first went to free in 2,004, we've gotten wiser about how to help customers realize the value of moving to a paid SKU. And that comes through a whole host things, the ability to import year over year information, the ability to get access to services like a refund bonus on an Amazon gift card. And so every year that we've had free, we've actually been able to hold or improve our revenue per return over many of those years.
This year, I would say, was the biggest step forward. If you look at the fact that we had the absolute zero program, free federal and free state for a period of time in the early part of season, and yet we exceeded our revenue guidance range that was really a result of a couple of important things. In addition to just growing customers which grows revenue, we had a better mix and that was because of last year's lineup change we made to TurboTax Online where we got customers into the right products, so they weren't trading down mid season. But the other one was this new bundle we put out there called it was basically the absolute zero, it was called free plus. What was the brand for?
Free plus bundle. Yes, free plus bundle. And what it basically was, was you could move up to $29.99 bundle and you would get access to storage and bulk capabilities. You would have the ability to do a refund transfer. You would have the ability to get an Amazon gift card.
We saw a really strong take rate there. So if you think about that going forward next year, I think our track record is we can bring people in on free. We can monetize many of them in the same season, but we also tend to monetize more of them the following season and that continues to be a formula that pays off.
Great. Thank you, guys.
Thank you. Our next question comes from Raimo Lenschow from Barclays. Your line is open. Please go ahead.
Thank you. Two quick questions. Brad, just to wrap up the tax season questions. Remember on the Analyst Day you talked about the 4 drivers and if they all come together then you can see a better growth rate than we saw in the last few years. Now you delivered 9% growth.
How comfortable are you about the sustainability of these results?
Raimo, right now we've put out there an outlook that we think that this business can grow 5% to 10%. And last year we were in the upper end of that range and this year we're in the upper end of that range. And as Neel said, we had a self inflicted wound. We made a change to our desktop product line up that cost us about $20,000,000 And if we hadn't done that and we have been able to do what we normally do and execute, it could have been a double digit growth year for us in revenue. So I think the question is fair.
Right now, we haven't changed the outlook on 5% to 10%, but we're clearly hugging the upper end of that range. And you know our company's financial principles are we believe we have businesses that can grow double digits organically. So I have increased confidence to 2 strong years in a row, but we're not changing the outlook yet beyond 5 to 10. But I think it's a fair question and a conversation we can have when we head into the new fiscal year as well.
Perfect. And a quick question for Neil or maybe Brad for you as well. You obviously have a very strong cash position. As you go towards more subscription focus, your results will be even more predictable. How do you think about dividend?
I saw the increase now, but your yield is still relatively low. Is that something that is on the top of your mind when you talk with the Board?
Yes, it's certainly one of the tools in the toolbox when we think about capital allocation and how to invest in spend going forward. We're still pretty early as a dividend payer and we brought the dividend amount up aggressively over the last couple of years. We'll review our plan overall with the Board in July and talk about a number of things around capital allocation, see where it goes and see where it goes from there. But you're right, the predictability and visibility into our cash flows and cash position is pretty strong. Free cash flow of the company is doing great.
And so we'll see how that allocates between internal investment, opportunities to grow inorganically and share repurchase and dividend. It's all they're all I'd like to think of them as levers we can use to return cash to shareholders and grow the business.
Perfect. Thank you.
Thank you. Our next question comes from Brad Zelnick from Jefferies. Your line is open. Please go ahead.
Thanks very much. After a great tax season, I know the whole team doesn't just go up to Disneyland to celebrate, but I'm sure you're already contemplating lessons learned and how you're going to apply those going forward. So I just wanted to touch on 2 issues that were very topical this season. First fraud and I know and you remarked on it a few times in the prepared remarks and it's always been very important to protect the taxpayer from fraud. And the other one is the Affordable Care Act.
Is there anything that was learned this season that changes the way you approach these topics next season?
Yes, Brad, thanks. First of all, you're right. We did head off to Disneyland or Disney World. The team is already working hard for season and I'm excited to see that sort of enthusiasm. The tax season lesson starting with fraud, it is clearly a situation, it is a massive attack on the U.
S. Tax system. It's not a company specific challenge and there's nothing we take more seriously than the privacy and security of our customers' information and the privacy and security information in the tax industry. So while we continue to make advances in our own product offering, things like multi factor authentication, the acquisition of a company called PortaCore in Israel, which is a leading security data encryption firm. And we're working with outside third parties like Mandiant, Palantir, FireEye, all those players and all those pieces are coming together.
We're also at the table. Industry and we have working groups going on as we speak to try to develop a set of standards and best practices to advance the collective safety of the entire U. S. PAC system. We have another meeting coming up in June and it will be information that the IRS Commissioner and others may choose to release after that meeting.
But net net, we are committed to this. There are lots of lessons learned as an industry. We're going to continue to raise our game and hopefully help the entire industry raise their game. The second is on ACA, the Affordable Care Act. I think the lesson learned here is that if we continue to do what we've done for 3 decades, make things that could be complicated simple.
They do not become an event for change. They actually become a catalyst for growth. A great example is we've studied really hard what happened in Massachusetts when at the time Governor Romney introduced a version of this. We learned from those situations and those behaviors and we took actions. And so while many thought that this would drive behavior shift from do it yourself to assisted, we thought it would be a catalyst.
And so our teams worked really hard to make it simple. And a proof point was this year one of the highest converting sections of turbotax.com from traffic into an actual customer was the Affordable Care Act section. Our team nailed it. And so that's why the digital category grew 6% and I think the assisted category again was roughly flat. Now we know next year there's going to be another big step forward.
The penalties go up 2x. Everyone has to have proof of insurance and we're already working on that as well. We refuse to make that a reason for customers to lose confidence and we're going to bring our A game and try to continue to push it forward. So the lessons are the absence of courage isn't the absence of fear, it's willing to stand up and face it. The Affordable Care Act was a boogeyman and it remains a boogeyman and we're standing up and we're facing it.
And I think we're helping customers through it pretty
well. Those are really important issues and I really appreciate your perspective. If I could just follow-up with a quick one for Neil. Neil, the consumer segment margin down a few 100 basis points versus a year ago. Can you just dive into that for us and specifically talk about acquisition costs for TurboTax?
Thanks again.
Yes. I think what you're seeing there is a $35,000,000 dividend we had this year. Part of that on the revenue side for the desktop lineup and part of it for a care cost around security and privacy. Those things hit us kind of after we had our plan baked for this year and already made some other commitments. As we think about next year and going forward, we included that in our resource allocation expectations going forward.
And so, that's how we think about that. It's clearly outstanding for us to perform as well as we did with the headwinds we had.
Agreed. Thanks again.
Thank you. Our next question comes from Scott Schneeberger from Oppenheimer. Your line is open. Please go ahead.
Thanks. Good afternoon, guys. Congratulations. I'm going to follow on that last question. And Neil asked you just I think you made a comment about some increased investment in consumer tax that will affect the Q4.
Could you just bridge a little bit the EPS outperformance in the Q3 yet the full year guidance not going up as much and the 4th year guidance down a little bit? I know you also had that non core sale in payments and I assume that's part of the answer, but just a little bridge there. Thanks.
Sure, Scott. I think most of the issue around the Q4 is just difficulty in modeling it out and hard for people to understand how the ratable impacts are going to flow through the full year. We're not anticipating any substantial investments in consumer tax in Q4 beyond what we have baked into our normal regular plan or things like that. So Q4 is kind of light for us. But I think the only the biggest difference there between what a lot of people had in their models and what we're guiding to today is really just been a difficulty of understanding the ratable impacts through the full year.
The comment I made about investments in consumer tax is just primarily an explanation for why we're able to raise our revenue guidance for the full year with operating income remaining in the same range. The $35,000,000 I just mentioned certainly has an impact on that and flows through at a pretty significant rate to operating income. So that's a big change in that area.
And was the payments asset sale meaningful to the bottom line?
No. It was $30,000,000 gross. So when that impact will overall would material to us in terms of operating income or EPS.
Okay, great. Thanks.
And GAAP only. GAAP only, Scott.
Okay. Appreciate it. Swinging over to consumer tax on the absolute free. Obviously, I think that's been very helpful. You mentioned on an earlier question that the last 2 years have been very impressive volume and with regard to revenue per return.
I'm not sure where to go from incrementally from absolute free. So and you may be formulating this in the off season, we hear about it at Investor Day. But Brad, could you give comments on what the next step is and what you're seeing with these bundle attaches and how strong revenue per return is that makes you as you answered an earlier question confident about the higher end of the long term guidance range for consumer tax? Thanks.
Yes. Well, Scott, first of all, I don't want to anybody's expectations that we're changing the 5% to 10% outlook. I think the question was fair when you're at 9% and you had a couple of things this year that could have made a double digit to ask. But that being said, as operators, we're very bullish on the do it yourself tax business. First of all, there's been a question for a few years, is there any opportunity to expand the TAM, the total addressable market?
And we said, look, there are 148,000,000 people who file tax returns, about 50,000,000 do software. We think there is. And if you look at the fact that you have new filers coming into the category every year, dollars 3,000,000 to 5,000,000 this year we actually outperformed versus our forecast on getting our fair share of those new filers. The second is, we were able to take share from category, which has been a question. And we've taken several points of share over the last 2 years and that's from the data reported by the IRS when you look at all the data that's out there.
And so this category has opportunity. The neat thing about Absolute 0 is, it's pretty much impossible for anyone to price lower than free federal and free state. But what is hard is to figure out how to do that and turn that into a paying customer. And we've got a lot of work and a lot of experience that helped us do that. And so we're getting much wiser at using that kind of a tool to expand the TAM and then really good at or much better at getting monetization programs whether it's attached services or new bundles to turn those into paying customers.
And that's the bullishness that you hear us talking about that plus the product innovations. So we'll talk more in the fall about what does that mean to the long term outlook. But right now, I like these last 2 years and I like the momentum the team has built. And I really have confidence that our tax business has a lot of upside as we look ahead.
Great. Thanks very much.
Thank you. Our next question comes from Greg Dunham from Goldman Sachs. Your line is open. Please go ahead.
Yes. Thanks guys. Just one for me and I'll switch gears back to the small business group. If you look at QuickBooks Online in the U. S, you've doubled that subscriber base over the past 2 years.
What are you seeing in terms of retention of those QBO subscribers specifically in the U. S?
Yes, Greg. What we're seeing right now is the retention rates are in mid to high 70s. We're improving the retention rates on a cohort basis. As you get payroll and payments attach rates, the more services that you sign up for, the stickier you become. Obviously, the product continues to get stronger, the new version, which we call Harmony, which continues to get more feature functionality in it, just add more reasons for customers to stay.
But right now when you put it together in the U. S, it's in that mid to high 70s as the retention rate for QBO.
Perfect. Thanks guys.
You're welcome.
Thank you. Our next question comes from Jim McNulty from First Analysis. Your line is open. Please go ahead.
Yes. Thanks guys. What are your takeaways with the trying to upshift people on desktop? Do you think you'll be able to do that in the future? Or are you not going to pursue that anymore?
Jim, are you talking about QuickBooks Desktop?
No. The TurboTax product trying to get them right sized to the product.
Oh, I see. So referring to the mistake we made this year where we tried to move feature functionality to match what we had in online and we had obviously some upset customers. Now we learned our lesson on that one, Jim. What we learned is the TurboTax online customers have a very different expectation and a set of experiences they want. Our TurboTax desktop customers, many of them began with letters that say I've been using this product for 20 years.
They want a great product that does exactly what they want it to do and they don't want a whole lot of changes to it unless it's going to make it easier for them. And so we're not going to be trying to mirror image TurboTax Online and TurboTax Desktop. We're going to make sure we deliver the best experience for the customer on whichever platform they want.
Great. And then it sounds like you really improved your sales and marketing efficiency for TurboTax this year. Maybe you could talk us through some of the things you were successful with?
Yes. I would just at a high level without giving out too many of the secrets that I know our marketing team would tell me please don't talk too much about this stuff. I would say, 1st of all, this was a very competitive tax season, very, very good competition that we're always up against and they brought their A game. They improved their products. There was aggressive spend in advertising and marketing.
There was aggressive pricing promotions out there. And even when we had the issue that we created for ourselves with the desktop product, our team stood in there and really had a good season. And one of the things I would say is, despite the fact that we did not spend to the level that we believe some of the competitors did, we actually held share in traffic and improved market share in terms of conversion into paid customers. And so we have a more efficient program because our message speaks to the end user. Don't be afraid of taxes.
Don't be afraid of the Affordable Care Act. It's amazing what you're capable of. It's simply yes and no answers to questions and then you will be able to get your taxes done and keep money in your pocket. That resonated last year, that resonated this year and we think we're going to continue to help empower the end user, so they believe in themselves next year as well.
Great. Thanks.
You're welcome. Thank you, Jim. Good talking to you.
Thank you. Our next question comes from David Togut from Evercore. Your line is open. Please go ahead.
Thank you and good afternoon. Hi, David. Brad, could you comment on unit pricing strategy both for TurboTax Online and philosophy. We don't want to at this point start talking about our processing lineup for the next year. It's a very competitive market out there.
But I would say overall, we've learned some important lessons about pricing and it really comes down to price value. So we tend to have the entry level price for all of our products is free, either free TurboTax or an extended period or a trial period in QuickBooks Online. But we also have learned that we can introduce additional services that we refer to as tax services and those tax services customers resonate with the value proposition and they go ahead and they add those on and it gets an increased revenue per customer. On the upper end of our product lineup, we start to run into much higher priced competitors and that's where we can tend to take some price. So QuickBooks Enterprise for example, it's about the third the price of the mid market ERP.
So we're able to take a little more price there. You get up to the upper end of TurboTax, the next alternative is going to a tax store and paying a couple of $100 So we're able to take a little price there. So we really have surgical pricing. We never get undercut on the low end. We're getting smarter to monetize with attached services in the middle and we take price where we've earned the right to do that against power price competitors on the high end and that's tended to be the philosophy that's worked for us.
Understood. Thank you very much. All Thank you, David.
Thank you. Our next question comes from Michael Millman from Millman Research and Associates. Your line is open. Please go ahead.
Thank you. Looking at the IRS numbers, you see that do it yourself self prepared as they call it increased about twice as much as the total, whereas assisted was called flattish actually up a little. So question is the comment is question to what extent is do it yourself still taking this market from paper? And how much of that is really left to move?
Yes. Michael, I would tell you, first of all, you know these numbers well and you and I have talked about this stuff when
we do our 1 on ones.
We're down to $5,000,000 $6,000,000 I think in total that the IRS says are out there in paper. When you look at the source of new customers we have, we're able to tell what you did. We're able to see if you used another software package, you went to a store, you went to a CPA or you're on paper. This growth in do it yourself is not coming just from paper. It is a secular trend towards digital.
And in fact, we've taken 3 points of the category and do it yourself or as you said the self prepared category has taken 3 points a share away from the assisted category over the last 2 years. And I think that's a fundamental belief that ultimately plays out because new tax filers come in and they're much more comfortable with technology these days. We have value propositions like absolute 0 as well as easier to use products that can import your data for you, so you don't have to do any work. It's actually telling people, well, I could get this done at a much lower price than if I go to a tax store. And those are the realities.
And I think by the way they play out even in our competitors' numbers. If you look at their own mix, whether they own stores and they also have software, look at which of their businesses are growing faster in terms of returns. And you can see the digital businesses are growing faster than the assisted prepared. And I think that's just a secular trend that's going to continue.
Well, understood, but kind of wondering the sources. Have you talked about what your share was absolute 0 or what share of your tax returns were absolute 0? And what the growth has been in kind of the 0 range from absolute to semi absolute?
Yes. I like the term, Mike. No, we haven't broken that level of detail out. As we get into tend to share a little more information around some of those pieces. But at this point, no, we didn't share any of that data.
Thanks, Brad.
You're welcome.
Thank you. I'm showing no further questions at this time. I would like to hand the conference back over for closing remarks.
All right. Well, I want to thank everybody for your questions and your comments. We're heading into the home stretch of this fiscal year we really like our position. We feel our financial results are strong and we're coming off one of the best quarters in our history. And while this momentum really feels good, we're certainly not resting on our laurels.
As someone said earlier, we haven't let the teams go off to Disneyland or Disney World. They're so fired up, they're already ready for next season. And as we look to our Q4 and beyond, Neil and I are really encouraged by the steps that we're taking to further strengthen the position in all of our businesses and functions. So with that, I really want to thank you for your time today and we want to wish everybody a good and restful Memorial Day weekend. Thanks a lot.
Ladies and gentlemen, thank you for participating. This concludes today's conference call.