Highlights From INTU's Q1 Conference Call: Issues Mixed Guidance for Q2, In-line for FY10

November 20, 2009 12:39 PM EST

Intuit (NASDAQ: INTU) reports Q1 adjusted loss of $0.10, 6 cents better than the analyst estimate of ($0.16). Revenue for the quarter was $493 million, which compares to the estimate of $487.69 million.

Highlights From INTU's Q1 Conference Call:

• Sees Q209 adjusted EPS of $0.29 - $0.32, versus $0.37 consensus.
  
• Sees Q2 revenues between $800-$835 million versus $833 million consensus.
  
• (CEO) In Q1, we delivered solid growth in our core businesses. In particular, we're pleased with the strong double-digit growth in both QuickBooks units and Payments/Merchants.
  
• We're also pleased with the continuing acceleration of revenue growth in our Financial Institutions business.
  
• In addition, our progress in successfully integrating PayCycle is on track, and we completed the acquisition of Mint.com in early November.
  
• Q1 revenue of $493 million, which is at the top end of our guidance range. Our results per share and our operating loss were both much better than the range that we had originally guided.
  
• Our Q1 performance enables us to absorb the impact of the Mint acquisition without adjusting our guidance for the full year. We still expect fiscal year revenue growth of four to 8%, operating income growth of six to 10% and free cash flow growth of over 15%.
  
• And while we do believe that we've seen the bottom, we haven't seen any sustained positive trends in consumer spending or new business formations to suggest a rapid recovery. More positive indicators may come during calendar year 2010, but I don't expect them to materially affect our results this fiscal year.
  
• Now, with that said, we do expect to deliver improved operating results without the benefit of a rebound in the economy.
  
• (CFO) The operating loss is slightly larger than we had last year, but it's important to note that last year's Q1 results included an unusual $17 million benefit from compensation-related items. Adjusting for that item, the Q1 operating loss is $7 million less than it was last year.
  
• In our Small Business Group, we continue to play offense, growing customers in all of our Small Business divisions.
  
• The economic environment remains similar to the past few quarters. Payments charge volume per merchant was down 8% year-over-year.
  
• Total Small Business Group revenue in the first quarter was flat with a year ago.
  
• In our Financial Management Solutions segment, QuickBooks units grew a strong 15%. Revenue declined 7%, about three points of which was driven by increased use of consignment in our retail channel and four points of which was driven by heavier promotion of QuickBooks 2009 than we had last year.
  
• Our Employee Management Solutions revenue was up 9%. The PayCycle integration continues to go smoothly, contributing to strong revenue growth.
  
• And we continue to see strong retention of our existing Payroll customers. Payment Solutions revenue was up 4% driven by strong growth in our customer base, which was up 12% in Q1. Charge volume per merchant was down 8% in the quarter.
  
• Our Consumer Tax group had revenue of $22 million in Q1, up 8 million from last year.
  
• TurboTax for 2009 will go on sale in retail stores on November 27, and the season begins in earnest in January.
  
• The Financial Institutions division continues to gain momentum with 7% revenue growth and strong user growth. Internet Banking users were up 4% in Q1, and Bill Pay users were up 18%.
  
• This quarter we signed a large regional bank that will become one of our largest customers when we convert them to our platform in 2010.
  
• Our Other Businesses segment posted a 5% revenue decline in Q1, driven by a later Quicken launch than we had last year.
  
• In Q1, we repurchased $300 million of Intuit stock, which used the remaining funds from our prior repurchase program. The board has approved a new repurchase program of $600 million.
  
• We are reiterating our full-year guidance inclusive of the Mint acquisition. For fiscal year 2010 we expect revenue of 3.3 billion to 3.43 billion, or growth of four to 8%; non-GAAP operating income of 985 million to 1.025 billion, or growth of six to 10%; non-GAAP diluted EPS of $1.89 to $1.96, or growth of four to 8%. (FY revenue consensus is $3.38 billion and EPS consensus is $1.94)
  
• As you may recall, in FY '09 both our GAAP and our non-GAAP EPS benefited from certain tax items. Adjusting for those items, FY '10 non-GAAP EPS growth would be eight to 12%. GAAP operating income of 785 million to 825 million, or growth of 15 to 21%, and GAAP diluted EPS of $1.49 to $1.56, or growth of 10 to 16%.
  
• For Q2 we expect revenue of 800 to 835 million, or growth of one to 6%.(Consensus is $832.99 million) This year we are expecting a $9 million shift in accounting professionals revenue from Q2 to later in the year; non-GAAP operating income of 160 million to 175 million, compared with 172 million in the year-ago quarter; non-GAAP diluted EPS of 29 to $0.32 (Consensus is $0.37), compared with $0.34 in the year-ago quarter; GAAP operating income of 94 to 109 million, compared with 109 million in the year-ago quarter; and GAAP diluted EPS of 15 to $0.18, compared with $0.26 in the year-ago quarter.
  
• (Q&A) My first question is around QuickBooks. I understand that there was some pricing discounting that impacted the difference between units and total revenue this quarter. But as we look into the next couple of quarters, can you talk to us about how you're thinking about what will drive that business between units and average selling prices? What will -- what should we think about as the mix being there?(A)We clearly saw a spike in our unit growth. It isn't what we have anticipated for the full year. It was driven by the fact that we were depleting the QuickBooks 2009 inventory and making room for QuickBooks 2010. As Neil mentioned, we learned a lot about the balance between how deep we needed to go with promotional offers and what kind of unit growth we could generate. So I think what you're going to see us continue to do is go for driving more units and category growth, but doing that with a better understanding of how we can capture more price per unit. So you're going to see the gap between units and revenue hopefully over the balance of this fiscal year start to narrow. But our ultimate goal is to continue to bring customers into the franchise, because we know we can increase the revenue per user 3x over a five-year period by selling things like Payroll and Payments and other services. But we'll be doing that with much -- hopefully much less reliance on promotions for the balance of the fiscal year.
  
• And if I could just ask one follow-up on the FI group, it sounds like you saw a nice big customer win there. How were total signings in the quarter for FIs? And do you feel like that market has stabilized a little bit in terms of being able to sign new institutions? (A)Yeah. Adam, we have seen a continued healthy pipeline of sales in our sales pipeline for Financial Institutions. We've also seen, as we've talked in the past, that pipeline that was already sold, but we're waiting for implementations to happen. Those are starting to break free. It's not anything that I would scream as a tremendous rapid recovery, but it's starting to move forward in the right direction.
  
• Good afternoon, guys. On TurboTax, could you talk a little bit about your strategy this year? It looks like once again you're pushing for units at the low end especially?(A)Yeah, Jim, our strategy this year is consistent with our prior years, and that is the biggest opportunity we have to grow TurboTax is to expand the share of our -- expand our category by capturing more people who are going to tax stores, continuing to convert people who are doing it with paper and pencil and converting more people who come into the category for the first time. So it's always about expanding the category and capturing our share of those users. So what you see us doing is we have a pricing strategy that begins on the low end with free, and we also continue to capture value on the high end when our value proposition is one-third cheaper than a tax store. And ultimately the goal is to grow that category, grow our share and then ultimately drive revenue as a result.
  
• And just as a follow-up, could you give us an update on your view of the -- what's happening with the Free File Alliance and with any possible legislation on refund anticipation loans?(A)Yeah, Jim. On the Free File Alliance, the Free File Association and the IRS continue to have very productive conversations. Nothing has been announced yet, but I like the momentum. I think the whole industry and the IRS are moving in the right direction and when something has been completed, that'll be announced. In terms of the refund anticipation loans, the good news for us is, as you know, we moved out of that business somewhere four, five years ago because we didn't feel that that was aligned with how we operated the company and the way we wanted to be working with our customers. So while I hear the intense negotiations and debate going on in the industry, regardless of how that plays out, that won't have an impact on Intuit.
  
• Hey, I was wondering if you could -- I know it's early with QuickBooks 2010, but I was wondering what you're seeing so far with this release versus last year? And also was wondering if you could share with us any signs that things are starting to get better? Salesforce.com made some comments on their earnings call that they've seen their SMB business start to up tick a little bit, and I was just wondering if you could share any thoughts on that?(A)I think first of all on QuickBooks 2010, it's still pretty early. We've been out in market for four or five weeks. We've got some positive indicators, positive reviews from PC Magazine and others. If you go to Amazon.com and you read user reviews, they're positive. If we check the sentiments in the accounting community, who recommends these solutions to small businesses, it's very positive.But quite frankly, those are all words until we actually see the customers buying the product and using the product. And so far we like the early results, but there's still a lot of game left in the year. So, I would tell you that we've put our best effort into this product this year. The team is proud of it, and they have a reason to be. The early results suggest that the customers like it, but we'll have to see if we can translate that sentiment into revenue and customer growth. In terms of what we're seeing in small businesses, we continue to hear the optimism and the voice of those small businesses. But as I've said before, they tended to be the last ones to see the downturn and the first ones to believe we were coming out because they're resilient by nature, and that's what I love about small business owners. But what we look for is whether or not the businesses are getting healthy, and the best indicator we have is charge volume. Are consumers shopping in their stores, are they using their credit cards, and are they able to continue to buy? And while we saw a slight up tick this quarter, charge volume is still down 8% year-over-year. It was down 9% for three consecutive quarters, but I don't think that's anything at this point that I would point to, to say we see a sustained recovery. So net net, I think we've seen the bottom in our rearview mirror. I don't see a real fast upswing. But we do see small business continuing to stay in there and fight it out, and we're continuing to do our best to execute and help them.

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