Matt Rhodes - VP, IR Brad Smith - President and CEO Neil Williams - CFO

Brent Thill - UBS Walter Prichard - Citi Brad Zelnick - Jefferies Sterling Auty - JPMorgan Nandan Amladi - Deutsche Bank Raimo Lenschow - Barclays Ross MacMillan - RBC Capital Markets Jim Macdonald - First Analysis Gil Luria - Wedbush Securities Scott Schneeberger - Oppenheimer Kartik Mehta - Northcoast Research Michael Millman - Millman Research

Good afternoon. My name is Latif, and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit's First Quarter Fiscal 2016 Conference Call. [Operator Instructions] With that, I'll 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 first quarter fiscal 2016 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 2015, and our other SEC filings. All of those documents are available on the investor relations page of Intuit's website at intuit.com. We assume no obligation to update any forward-looking statement. Some of the numbers in this report are presented on a non-GAAP basis. We 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. Also, all reported results and guidance, except GAAP EPS, 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. And with all that, I'll turn the call over to Brad Smith.

All right. Thanks, Matt, and thanks to all of you for joining us. We're off to a strong start in fiscal 2016. In our first quarter of the year, we grew revenue 17%, and exceeded our QuickBooks Online subscriber and our overall financial targets. While it's still early, we're raising our EPS guidance for fiscal 2016 based on the strength we've seen and the substantial number of shares that we repurchased in the first quarter. We are generating strong new user growth in the online ecosystem. Over 80% of QuickBooks Online customers continue to be new to the Intuit franchise and total QuickBooks paying customer growth was also healthy, as our desktop business posted a strong quarter. QuickBooks Online continues to build momentum. We grew total QuickBooks Online subscribers 57% in the first quarter. This resulted in the addition of over 80,000 QBO subscribers in the quarter, bringing us to 1.159 million paid subs worldwide at the end of October. Roughly 35,000 of our QBO subscribers are using the QuickBooks self employed SKU, which is up from 25,000 last quarter. Outside the US, QuickBooks Online more than doubled, to 215,000 paying subscribers. We remain focused on executing against a compelling long-term growth opportunity. QuickBooks Online has very low penetration, when you consider our total addressable market of more than 65 million small businesses, in our prioritized countries, and more than 40 million self-employed individuals in the United States and the UK. We are encouraged by the continued momentum and the opportunity ahead of us, if we continue to execute well. With that overview on small business, let me now shift to tax. We're looking forward to the kick-off of the upcoming tax season, where our game plan is a continuing focus on driving customer growth and market share. Security will remain a critical priority for us. We're working closely with the IRS, state governments, and the tax-preparation industry to create and deploy a new set of common security standards and data protocols to accelerate the fight against tax fraud. Across the company, we're where we want to be at the early juncture of this new fiscal year, and we remain confident in the long-term growth trajectory, as demonstrated by our share repurchase activity in the first quarter. So on that note, I'm going to hand it over to Neil to walk you through the financial details and our guidance.

Thanks, Brad. For the first quarter of fiscal 2016, we delivered revenue of $713 million, up 17%. This growth reflects the changes we made to our desktop software offerings in fiscal 2015, resulting in ratable revenue recognition. We also delivered non-GAAP operating income of $46 million, a GAAP operating loss of $29 million, GAAP earnings per share of $0.09, and a GAAP loss per share of $0.11. I'm pleased to report that we had non-GAAP operating income, instead of the loss we typically report in the first quarter. This is a result of our ongoing business model shift, which is driving more predictable and stable revenue streams. Turning to the business segments, total small business segment revenue increased 5% for the quarter. Small business online ecosystem revenue grew approximately 28% for the quarter, as customer acquisition continues to drive growth. QuickBooks Online subscribers grew 57%, online payments customers grew 4%, and online payments charge volume grew 14%. Online payroll customers grew 17%. Switching to desktop, total desktop ecosystem revenue declined 1% for the quarter. QuickBooks desktop units were flat in the quarter, as we continue to emphasize QuickBooks Online. That said, our desktop performance in the first quarter was a bit stronger than we expected, and as a reminder, our plan assumes units will decline for the year with desktop ecosystem revenue roughly flat versus last year. Consumer tax revenue was the same as the first quarter last year. As you know, our consumer tax business is highly seasonal, and our first quarter is a light one. To help with your modeling, we expect second-quarter consumer tax revenue to be significantly higher than last year, reflecting a shift from the third quarter to the second quarter, primarily driven by an extra weekend day in January 2016. We will continue to invest in the product experience and to prioritize growth in share and customers above margin expansion in consumer tax. Our ProTax group grew revenue more than 200% to $110 million, driven by changes in our desktop offerings, where revenue is now recognized ratably as services are delivered. For the second quarter of fiscal 2016, we expect ProTax revenue of approximately $75 million. For the third and fourth quarters, ProTax revenue should be roughly the same as fiscal 2015. We continue to take a disciplined approach to capital management, investing the cash we generate in opportunities that yield an expected return on investment greater than 15% over five years. Our first priority is investing for customer growth. We repurchased $1.3 billion worth of shares in the first quarter, at an average price of $88.50 per share. We have about $1.4 billion remaining on our authorization and we expect to be in the market each quarter. Our cash and investments balance was $474 million at the end of the first quarter, including $350 million from our revolving line of credit. Our Board approved a $0.30 dividend per share for our fiscal second quarter, payable on January 19. This represents a 20% increase versus last year. And one final note on capital allocation, the process to sell Demandforce, QuickBase and Quicken is going as planned and we expect to complete the divestiture process in early 2016. Turning to guidance, we've provided our guidance for the second quarter in our press release. We raised our EPS guidance for full fiscal 2016 reflecting the stepped up share repurchase activity in the first quarter. We also reiterated our full-year revenue and operating income guidance. As a reminder, we expect to provide a tax unit update in late February, concurrent with our second-quarter earnings release. Our release in February will be a little later this year, based on the way the calendar falls. We'll also provide a final unit update in late April, after the tax season ends. And with that, I'll turn it back to Brad to close.

Thank you, Neil. It's obviously early in our fiscal year, and there's a lot of game left to be played, but we are off to a great start. This past year we made huge strides in increasing our strategic focus, and defining a clear set of company-wide priorities that are designed to make the Intuit ecosystem even stronger. With the shift to the cloud and mobile devices we are growing our categories faster than historical rates. New customers are choosing our cloud solutions, and we're bringing new users into the category, as we expand into new customer segments such as self-employed, and enter new geographies across the globe. The proof points are evident, and the momentum that we're building as the QuickBooks online ecosystem continues to grow at a very healthy rate. We're also gearing up for tax season and looking forward to getting our new offerings out into the market in the coming weeks. As always, I want to thank our employees for their hard work and their ongoing focus. And lastly, I want to thank our outgoing Chairman, Bill Campbell, who has been instrumental in moving this company to new heights. Bill has been inspiring Intuit for more than two decades, and it has been a privilege and an honor to serve with him. And with that, we'll turn it over to you to hear what's on your mind. Latif?

Thank you. [Operator Instructions] Our first question comes from Brent Thill of UBS. The question please.

Thank you. Good afternoon. Brad, maybe if you could just level set us going into this year's tax season, what you see as similarity to last year, and maybe the things that are a little different? And for Neil, that was an impressive buyback number, I think you bought more stock back in Q1 then you bought all last year. It sounds like you've still got more room to go there. But can you just walk through how you're thinking about the remaining portion, that would be helpful? Thank you.

Okay, Brent. I'll start first. This is Brad, talking about tax season. So what we see is the same is a continued shift towards do-it-yourself software, which you've seen for the last decade, which has been growing mid-single digits, while the assisted methods have been flat to slightly down. We also continue to see an opportunity for us to step forward in our multi-year journey towards our vision of taxes are done. So you're going to see innovation coming out in our products that make it a lot easier and simpler for customer to get the maximum refund in the shortest amount of time. Ultimately, you're also going to see us continue to push towards and you'll see others as well, how to continue to make the Affordable Care Act simple to execute. So far, that has had no impact in the tax industry, and we don't foresee that changing this year either. The last thing I would say is you are going to see the continued competitive intensity that we have witnessed in this category for more than a decade. Lots of competitors, including us continuing to step up their game, which is only good news for the tax payers. What will be different this year I think, are a couple of things. One is just calendar, you heard Neil mention earlier we're going to have an extra weekend in January, so that will shift some revenues around a little bit, but we have tried to articulate that by saying expect a bigger second quarter than a third quarter in terms of last year's comparison, you'll see a bigger second quarter now. The second is, we now have a systemic approach to fighting tax fraud at the federal level, the state level, and all of private industry. We have over two dozen companies sitting around the table, we've been meeting regularly. We have multiple work streams. We have the states and the federal government all collaborating. And we collectively have agreed upon a set of common standards and data protocols. We've agreed upon a set of leads reporting and a frequency of communicating information with the federal and state levels. We've also agreed to more information sharing, so as private industry, we can tune our algorithms into a better job of identifying suspicious activity for the government agencies. And we've also adopted some best practices called a NIST framework, which is basically what the financial services industry has adopted. So a lot of things are the same, continuing innovation, a continued shift to do it yourself software. The changes are the calendar moved a little bit on us, which will simply mean we'll move a little bit of revenue into the second quarter, and you are going to see a more holistic approach to fighting tax fraud, both between private industry and the government.

And so, Brent, speaking about the share repurchase. We think that share repurchase has been a consistent way for us to execute and an effective way to return capital to shareholders. Clearly, we thought the values we saw in the first quarter provided a great return opportunity, well in excess of our thresholds. And so we took advantage of that opportunity. And this is what we talked about in terms of borrowing money for opportunistic reasons, and this is a great opportunity to use our revolving line of credit and take advantage of what we felt like was a valuation situation that did not reflect our long-term plan, and the return we expect to deliver. So we revised our share count for the year to reflect that we do expect to be in the market for the balance of the year, and so we'll see how that plays out. But we like share repurchases. I think it's been an effective tool for us, and we'll continue to use it.

Thank you.

Thank you. Our next question comes from Walter Prichard of Citi. Your question please.

Hi, thanks. Brad, I wondered if you could talk about the combination of stronger desktop units and also pretty strong US online sub add. It seems like in the past, you’ve had a little bit of a trade-off sometimes between those and wondering where promotions factored in and other things like that, on that strength in desktop?

Yes, Walter. We had talked over the last few quarters that we continue to test what's the right level of promotions, pricing, on desktop while we also continue to drive the QBO subs growth. And I would say in the last two quarters, we've really started to find the sweet spot there. What we've learned is the desktop customers aren't going anywhere, if they're not choosing our cloud solution. At the same time, we started to notice a pattern where they were delaying their repurchase, and looking for promotion or waiting a little bit further into the discontinuation period. So you know they're good for three years using licensed software, and we want to make sure that we give them a reason to move, and make a purchase decision if we have good features or we have something we think is a good opportunity for them. So what we did this last quarter is, in addition to continuing the QuickBooks Online subscriber momentum at 57% growth, we were able to find the right level of activity in terms of price and promotion to get the desktop customers to also to continue to use the product. And I think that's something that we are feeling pretty good about now, because it's not cannibalizing QuickBooks Online, but it's keeping our desktop customers active in the base, and that's a win-win for everybody. And I think that's what you saw in the first quarter.

And then just to follow up on the security side, when you think about what happened last year and again, sort of something that caught the industry by surprise. How are you thinking about the additional measures that may have to be put in place during tax season, and what impact that could have on just kind of overall unit growth and the inconvenience factor of adding measures like that in, in terms of bringing new self-service users into the base?

Yes, I would say, first of all, the collective industry has a common goal and this is in conjunction with the governments. We want tax fraud out of the US tax system. So we've all agreed to a common set of standards that will make it difficult, no matter which route you go, whether you go to a tax store and you use a CPA, you use do it yourself software. We don't want any corner of the tax system to be vulnerable to someone coming in and trying to do something that's not appropriate. So that's bucket one. And then bucket two is, we continue to make that as frictionless as possible for the end user. And so whether it's Affordable Care Act, which we been able to show we can make something pretty complex pretty simple for customers over the last several years or in this case, using security, we're continuing to lean in to make those innovative techniques, so that it doesn't make it harder for the customer, but continues to protect their information. So I don't think you're going to see shifts moving around because of security, because everyone has agreed to a very common set of approaches. And we're collectively leaning in to get tax fraud out of the system.

Great. Thanks, Brad.

Okay.

Thank you. Our next question comes from the line of Brad Zelnick of Jefferies. Your line is open.

Fantastic, and thanks for taking my questions. It's great to see you maintain the strong QuickBooks Online subscriber momentum. But the guidance for Q2 seems to imply significant acceleration, and you are retaining the full year versus raising it. Is there any reason to think that seasonality is different versus your original expectations or anything unique, as we look into Q2?

Yes, Brad, there really isn't. Obviously, we're very excited about the continued momentum, as we just posted in the first quarter. It's still early in the game, and so we want to see a couple more months and potentially a quarter or two here of this kind of acceleration, and if we feel that our guidance as a result of that may be a little too conservative, then we'll update it then. But there isn't anything in terms of seasonality or anything in the balance of the year that would lead us to believe that there's a shift. It's just basically, it's still early in the game, and we want to see this momentum continue before we talk about whether or not we need to be looking at a higher number in our QBO subs guidance.

That's fair Brad, that it's early in the year. If I could just follow up on average revenue per customer. Can you maybe share any commentary if you break down the QBO base into its various cohorts, how are things trending there, as we come out of Q1?

Each one of them are moving up and to the right, and so QBO US, continues to get stronger in terms of its average revenue per customer, QBO non-US, the global entities, if you look at the cohort analysis, also continues to get stronger. You have the QuickBooks Self-Employed, which we continue to get more customers signing up for that service, and that's also improving. And of course the desktop business we talked about a few minutes ago. What is happening, obviously is the mix, and as the mix shifts, it will bring the combined average revenue per user down a little bit. But each of the cohorts are actually moving up to the right. And as our teams get wiser on things like promotions and discounts, we just continue to see that as an opportunity to improve.

Thanks, Brad.

All right.

Thank you. Our next question comes from Sterling Auty of JPMorgan. Your question please.

Yes, thanks. On the security front, you answered the revenue question, but what I'm a little bit curious about is how much incremental spend is necessary to put all of these processes and systems in place? And how should we think about that impacting the margins in the consumer tax business through this year?

Sterling, this is Neil. We talked about this last season and said we're going to spend whatever it takes to be sure that we have the absolute best security and privacy features in all of our tax products. You can assume that we've allocated that appropriately, and it's baked into the guidance we've given. We've talked about keeping our consumer tax margin in the 60s, and I'm pretty confident we can spend what we need to spend in that area, and still be true to that profitability goal. We've got some flexibility, in terms of how we allocate costs in that business, and we really started it early in the season last year. So based on what we see at this point, I think we've got things covered within the guidance that we provided.

Okay. And then my follow-up would be on the QBO side, you talked about the 80/20 split continues as you've seen it. Any new update on the programs and things that you're doing to try to motivate further conversion of the desktop users, the existing desktop users?

Yes, Sterling, it's Brad. So we're continuing to add the feature functionality to QuickBooks Online. This month, we're adding deeper inventory capability that we've been talking to you about, so that'll help us get more product-based businesses in. We think between now and the spring, we'll start to see some of those inventory-based businesses from desktop now have an opportunity to potentially move to QuickBooks Online. We're on a good road map to get job costing, which is another important feature, into the product for QuickBooks Online towards the end of this fiscal year or early fall. That will also open up an avenue for other customers who may want to move to the cloud to move over. And so those, in addition to continuing to work and educating the customer on the benefit of the cloud, and working with their accountant to get them comfortable and recommending it, are those primary methods that we're using, and we continue to see good momentum there.

We've also got the Chooser SKU, that's up this year. Customers who buy a desktop version can try QBO without actually converting from desktop, they can try the two in parallel. So that's another way to give people an opportunity on the desktop side, to try the online product without having to commit all in.

Great. Thank you.

Thank you. Our next question comes from Nandan Amladi of Deutsche Bank. Your question please.

Hi, good afternoon. Thanks for taking my question. So, the recent QuickBooks connect conference was quite a bit larger than last year, you had a lot more partners at the event. What was the feedback that you got, and how does that influence both your pricing, as well as your road map for the next year or two?

Yes, thank you, Nandan. This is Brad. First of all, for those who don't know, QuickBooks Connect was our customer user conference, and this included not only small businesses, but accountants and third-party software developers. The attendance blew past last year, and last year was an awesome event for us. For those who had the chance to follow, we had keynote speeches from individuals like Oprah Winfrey, we obviously had members of the Shark Tank there. We had Bill Rancic, we had Jessica Alba, and so a really star-studded lineup. The feedback has been incredible. Not only have we gotten great feedback from the developers, we had a Hackathon that occurred, and we had third-party developers showing up with apps that are even much more exciting than we saw last year, and as you saw, last year we had about 500 apps working with the QuickBooks Online platform. Now we're over 1,600 and we think this is just going to fuel that momentum. The feedback from the accountants was incredible. They had the opportunity to learn about important tools. They met as a sub-group for a full day on their own, and they learned from each other, and they learned how to use the tools to make themselves more productive. And the small businesses, I have all kinds of notes for those who actually follow any of the Facebook or Twitter or LinkedIn. You'll see customers posting quotes like, this was life-changing for me. And life changing, because honestly, the things that were shared by some of these keynote speakers, as well as their peers, gave them ideas that helped them get pain out of their life and helped them do more productive things. And so it really was positive, and we expect this to be another catalyst for our growth going forward.

Thank you. And a quick follow-up if I might to Neil, CapEx guidance raised significantly. I know you're planning to buy a campus in San Diego. Is that the only major change there, or was there anything else?

That's right. We had an opportunity to buy our campus in San Diego. This is the home of TurboTax and a number of our corporate functions. The campus there was really built to our specifications, and we moved in back in 2007, so the lease was going to come up for renewal next year. And we got an opportunity to acquire the campus at a level that reduces our operating costs going forward, and meets all of our investor growth criteria. So that's the primary cost of the increase in CapEx, and I know we haven't talked a lot the proceeds from the Denali assets, but I would just tell you, that I think we'll more than offset our CapEx plan for this year when those assets are sold.

And just as reference, Denali is code name for the three assets held for the sale, so Demandforce, QuickBase and Quicken, just wanted to make sure, sometimes our internal vocabulary…

What a code name.

It's all good, buddy.

Thank you.

Thank you. Our next question comes from Raimo Lenschow of Barclays. Your line is open.

Hey, congratulations on the great start to the year. Two questions from my side. First, Brad, can you talk a little bit about the up-sell opportunities around payroll and online? I did - I think I remember, I asked that question on online last quarter, and you talked about tougher, comps et cetera. But how do we have to think about the growth rates there? And then one question, the other question was on the tax updates. Now that we have eliminated a lot more of the fraud, will there be an issue for us if you compare year-over-year units there that we need to adjust it? So not that we all get a shock when the first update comes and it all looks like the lower numbers? Thank you.

Yes and Raimo let me ask you for clarification on your first question, when you talked about up-sell on payroll and online. Are you asking the question around attach rates for QuickBooks Online for payroll and payments or what specifically would be helpful for you?

Yes. The attach rate, and I think around it the analyst day, we talked a little bit about, you weren't 100% happy maybe with what's going on in payment and any kind of comment around the progress there? Thank you.

Got it. All right. Thank you. So first of all, the attach rates continue to be very strong in QuickBooks Online for payroll and payments. New users attaching to payroll were roughly 21% this quarter. That's optically down a little bit from last quarter, but it's really just the growth of QuickBooks Self-Employed. If you back them out, the attach rates would be pretty similar, it's about 24%. Payments actually increased in attach rate. Up 12% this quarter, up from 11% last quarter, so we continue to get new customers opting in for these additional services, which really bodes well down the road. In terms of the desktop performance in payroll and payments, we have had solid performance in the payroll side. On the payments side, we've acknowledged we've had some execution misses. In particular, as we focus more to the cloud, we've allowed our payments service on the desktop side to become less flexible, and ultimately, we weren't really providing the kind of service to high value customers that we should. Our team has gotten underneath that, and gotten to root cause. We put some good plans in place, and over the last several months, we've seen an improvement there. So we anticipate we're going to be able to stem the tide on the QuickBooks payments side, and we're going to continue lean into the cloud, which is where the growth is. Tax updates and security. Honestly, Raimo, we are collectively as an industry unsure of just what exists in the United States tax system, in terms of fraud. We've been doing our parts and trying to keep bad guys out, and ultimately report anything that's suspicious to the government, who ultimately has to decide whether it's a real or a fraudulent filing. And the IRS has historically not been able to share any information back with us, until recently as a result of this summit, where they've got approval now to begin to do information sharing with private companies. So I think we're all collectively just going to have to navigate through this. But I think what you're going to see is if there is any reset, it will be system-wide. It won't necessarily be company specific. It will be everybody who will start to see a change, and we'll do our best to try to explain any of that if that happens. But right now, we're just excited, everybody's lined up against a common enemy, which is cyber threats.

Perfect. Thank you. That's really helpful.

Okay.

Thank you. Our next question comes from Ross MacMillan of RBC Capital Markets. Your line is open.

Thanks so much. And congrats from me as well. Brad, I had a question on the desktop QuickBooks product. Flat units is obviously a lot better than the trends you saw last year, but it does sound like you still expect those units to trend down. I had a question on pricing. Can you just outline what you're doing on pricing on the desktop product this year, both what you've done so far, and what you maybe plan to do, if you plan make any changes that needs to be?

You got it, Ross. Thanks for the question, and thank you for the feedback on the quarter. So let me start first with the desktop unit. As we just reported, we did have a stronger quarter than we had originally forecast. We aren't at this point going to bring our original guidance -- we're not going to change it, but if we see another quarter like this, then we're going to need to rethink whether or not the desktop is going to decline as quickly as we thought. And that's only good news for us, because that means more paid QuickBooks customers, both in the cloud and desktop. So right now, I would tell you that we're treating this one as a welcome set of good news. And if we continue to see this good news, then we'll talk to you about whether or not the desktop will continue to decline at the rate we originally forecast. In terms of pricing, it's really -- it's more strategic pricing, QuickBooks enterprise, we were able to take the price up, and that continues to show strong unit growth, as well as revenue growth. In the QuickBooks Pro and Premier line, we have found that promotional discounts to get the customer to basically come in and go ahead and make the purchase are working well for us, and they're not cannibalizing QuickBooks Online. So I'll give you an example. If we promote around $199 in QuickBooks Pro, we actually see good strong unit lift, and that's incremental to the overall revenue, and it does not cannibalize desktop, or excuse me - it does not cannibalize QuickBooks Online. So net-net, it's really just getting smarter about the pulse promotions that we work with retail channels, and we've been raising price where it makes sense, like QuickBooks Enterprise, and that collectively is adding up to the strength you saw in the first quarter.

That's great. And just a quick follow-up on the international QBO add, should I view that number really as telling me that you'll be selective about the quality and/or the ARPU of the international adds that you are targeting now? Thanks.

Yes, Ross, that's exactly the way we are looking at it. So we love the strong growth continuing, it's more than double, 110% up to 215,000 paid subs. However, we've seen some opportunities that we think we're going to continue to refine. For example, in India, we've taken the price up, and as a result, that's had a modest impact on the subs growth, but we're getting a much higher revenue per customer, which we think makes sense for the long term. We've also sold some things like in Canada, where we were selling QuickBooks Online in a box at retail, we had already pulled that out of the United States because we didn't like the attrition rates it was causing, and we started to see similar patterns in Canada, so we pulled back on that as well. So it's really just getting refined thinking around what is the right price in each of these countries, while continuing to sustain strong subscriber growth, and that is what you saw show up in our non-US numbers.

Thanks so much.

All right.

Thank you. Our next question comes from the line of Jim Macdonald of First Analysis. Your question please.

Yes. Thanks, guys. How is your new finance offering going at where you're going to help small businesses get loans?

Yes, Jim, it's good to talk to you. QuickBooks Financing is going incredibly well right now. We've been able to facilitate over $250 million worth of loans with qualified lenders and qualified small businesses. We have good demand from alternative lenders and banks coming in and wanting to connect to the platform, and we're seeing customers actually get approved in a matter of hours, and so we like the early results of this, and we're going to continue to lean in.

Okay. Great. Could you just explain again the quarterly impact for TurboTax? I guess I didn't hear it properly.

You want to take that one, Neil?

Sure. First quarter this year, Jim, is about the same as last year. What we've signaled here is that we think the quarterly - for second quarter is going to be significantly higher than we had last year. It's going to be a pull in from Q3 because we got a few more weekend days in January for the tax - in our second quarter this year than in the past. If you go back a ways and you look back to 2012, and some of those early years, you're going to see a little more -- a slight seasonal shift, we think, into Q2 from Q3. Still going to be the same guidance we talked about for the full year, but we're anticipating now a little more in Q2, a little less in Q3.

Okay. Thanks a lot.

The last couple of years have been a little more skewed due to unusual situations that at this point, we don't see coming up this year.

So Jim, that headline that Neil hit on there was fiscal year '12 was probably a pretty decent proxy in terms of seasonality. So for those out there looking at the models, if you kind of go back to fiscal year '12, that’s probably a little more like what we anticipate.

Exactly.

Yes.

Got it.

Thank you. Our next question comes from the line of Gil Luria of Wedbush Securities. Your line is open.

Yes, thank you. Good afternoon. There was a little IPO today, Square, it's a partner and then sometimes a competitor of yours. And they've raised a couple of interesting questions in how they approach this strategy in terms of decisions you've made and are making. One is, they have this strategy of using payments as a razor, and trying to sell other products such as payroll, for instance, as a razor blade. That's something that you decided a year ago not to do. Could you get into why you don't think that worked as a model, and why you just made that decision? And then, you brought up of the $250 million of small business loans that have been made off your platform. Again, they have already, in just a few short months, extended even more credit than that, based on the fact that they have the visibility into the revenue, and access to the payments to these merchants. You have access to the entire set of financials through QuickBooks, and then you've been serving this ecosystem for a very long time. Why not accelerate, or why are you not accelerating the growth of that business. What are the things that are making you grow at the rates that you been growing, as opposed to you trying to accelerate the QuickBooks financing option?

Yes. Thanks, Gil. First of all, we are excited to see Square's success coming out. They're a good partner for us. It's good news for small businesses. Over half of small businesses still don't accept electronic payments. The more players who get into this space, get small businesses looking for new solutions. And of course, we want every one of these payments providers to work with QuickBooks. And so that's why having them as a partner is good news for small businesses, because their data flows seamlessly from their payments into their accounting. And it's good news for us, because it makes QuickBooks Online the operating system that small businesses all depend on. So we're wildly excited about their success and pleased to hear the results. In terms of their approach to payments as a razor, and then opening up to other blades, that's not unlike our own approach. We just happen to believe, and we already have a center of gravity called small business accounting, where people get money in and money out. They either have to accept the money or owe somebody money, and that happens to be called accounting. And with that, we have razor blades like payroll, payments, and other services, including third parties. Why we chose not to go the route of payments being the open door was quite frankly, our payments products was not architected to unlock into another product. We've been working on that with QuickBooks, excuse me, the QuickBooks payments Go Payment product is now working with QuickBooks Online, and so if you come in with Go Payment, we want to have you be able to unlock into accounting and other services. So we think the strategy makes sense. It just happens to be for us, we believe the center of gravity, the operating system is small business accounting. The other piece was financing, and the honest answer is why are we not ramping as quickly as maybe Square did, is because we chose not to. We were in test mode, we were in beta. We were testing the quality of lenders. We were testing whether or not we could get the lowest rates for small businesses, and we wanted to make sure the Net Promoter score was superior. As we started to see those things all go green in the direction that we wanted, we started to open up the throttle. So we haven't been in the market as long or as aggressively. We have been talking to you about it, as it's been in test mode, but we've just recently said, this is exactly where we want it to be, and we're leaning in. So I think you're going to see this continue to ramp.

Got it. Then a quick follow-up on tax. I know these are the very small quarters, the last couple of quarters are the really small quarters, but you grew 8% during the season. The last couple of quarters have declined. Again, I realize they are very small quarters, but is there anything to call out as to why the last six months of results in consumer tax are down year over year?

No. In fact, if you look at the total numbers that get published by the industry overall, whether it's competitors or it's what comes out of the IRS, there's been no shift in share, there's been no shift between methods. There's nothing that's happening out of the normal. It just happens to be every year sometimes people file their taxes on time, sometimes people file their taxes a little bit later, and we just want to make sure that in the absolute universe, that we are continuing to hold or gain share, and right now, we're seeing that happen.

Great. Thank you very much.

Okay. Thank you, Gil.

Thank you. Our next question comes from the line of Scott Schneeberger of Oppenheimer. Your line is open.

Thanks. Good afternoon. Neil, I know you spoke to the CapEx change in an earlier question, but could you talk a little bit to when the purchase of the San Diego campus, is that all - is all the money outflow going to be in fiscal '16? And did I hear that it sounds like you may be selling your other three business units sooner than later, and that may reduce the CapEx absent the San Diego purchase?

Hi, Scott. First of all, we - it looks like now we'll close on the San Diego campus in January. And so, yes, all the money will flow out on that, whatever that transaction is completed. We don't have a date set yet, but I would expect it to be in the second quarter, probably in January. As far as the sale of the three businesses, Demandforce, QuickBase, and Quicken, those are actually on the track that we set out back when we announced this back in August. And so will it be in the second quarter or early third quarter. I'm not sure at this point, but I can tell you we're making good progress on them. And we haven't talked explicitly about the proceeds we expect to receive in those businesses, but suffice it to say I think it'll be well above our total CapEx outlay for this year. So, I can view that as offsetting the money we're paying out. And by the way, the money were investing in this real estate is going to be a help for us in our margin expansion in the later part of this year and next year, too. So, should come within a few months of offsetting the cash in and cash out.

Great. Thanks. And as a follow-up, just on ProTax and consumer tax, on ProTax first, when we look ahead to fiscal '17, should we look at a similar quarterly cadence, as you've just provided on this call for fiscal '16? And then, on consumer tax, you mentioned you are looking for similar margins with -- someone asked on fraud spend, anything different on marketing spend, timing, or magnitude this year? Thank you.

Yes, Scott. The cadence you see for ProTax for 2016 ought to be the right cadence for next year. All the changes we made to the products and to the way we deliver those services for this year ought to track right into next year, so modeling ought to be very similar. Brad, do you want to speak to the marketing on consumer tax?

Yes. Happy to do that. Scott, we're continuing to focus on effectiveness, and that will actually drive efficiency. So in terms of the marketing campaigns, our whole category - our approach is to expand the category and continue to gain share, and do that by empowering taxpayers to know that they are more capable than they may think to do their own taxes and get a great outcome. In terms of the dollar spend, we aren't looking to increase that dollar spend year over year, but to get a bigger bang for every dollar we do spend and I really like the plan that the team has in place, and we're looking forward to the tax season and kicking off here in a couple weeks.

Great. Thanks very much.

All right.

Thank you. Our next question comes from Kartik Mehta of Northcoast Research. Your line is open.

Hey, good evening, Brad. Just on the tax side, do you anticipate anything different in terms of pricing or maybe products from your competitors?

Kartik, every year, we continue to anticipate the most competitive environment that you can imagine for tax, because it's been that way for quite some time. So my anticipation is that all of our competitors, like us, will continue to put innovation into their products, to make their products easier for taxpayers, and I think the pricing will continue to be competitive. I'm not sure we can get more competitive than zero, absolute zero and free, which is where we've been, but I certainly would be prepared for a very competitively intense tax season, and quite frankly, that won't be new, that will not be unique to this year.

You talked about the ACA and obviously, you have a product to help consumers with that, but it seems like the key is going to be communicating to the consumers that they can easily finish their tax returns using your product. And I'm wondering, you talked about not spending more on marketing. Is it that you're just going to allocate more to communicating about ACA, or do you think that is not necessary, and you'll just do your normal marketing about the product itself?

Well, I think the good news here, two parts on ACA. We shared with you last year that one of the highest conversion portions of TurboTax.com was actually the Affordable Care Act section, where people who came to TurboTax.com to get questions answered. They could use the free tools that we had to help them figure out their income or their subsidies due, or their potential penalties, and then they converted right into the product, which takes us to marketing. And right now, we're in the neighborhood of having almost 100 million people in the United States, out of 150 million, already coming to TurboTax.com. So it's not about getting even more people to the website, it's about getting more of that 100 million roughly between the US and Canada to convert into paying customers. So for us, it's about doing our job better. Continuing to make our products easier to use, and helping people get the questions they have around the Affordable Care Act answered, and that's why you hear us saying that we think we've got the right tools. We think we have the right marketing mix, and it's going to be a matter now of getting in the season and trying to match those words with the results.

Thanks, Brad. I appreciate it.

All right. Thank you.

Thank you. Our last question comes from the line of Michael Millman of Millman Research. Your line is open.

Michael, are you there?

A moment, we are trying other line. Mr. Millman, your line is open.

Thank you. Is that working, hello?

It is. Michael, we can hear you. Yes, we can hear you.

Okay, sorry. On the fraud work that you've done, lots of people think that the EIC was -- at least a lot of it related to EIC filers. So wondering to what extent do you think the changes will either reduce some of it, not only reduce some of the fraud, but reduce some of the actual EIC filing. To what extent do you think it might push some of that filing away from do-it-yourself to assisted. And I also have a question regarding what Ryan is pushing to do in terms of simplification that might have more legs than a typical political talk. To what extent do you think your mobile solutions will benefit from that, or to what extent might the whole industry lose some momentum regarding a Ryan policy? Thank you.

All right. Thank you, Michael. You got some good meaty questions in there, so we'll try to take them one at a time. Let me talk about earned income tax credit, which is a very important subsidy for a deserving group of taxpayers out there. It's unfortunately been a very complicated area. There was a lot of testimony actually covered in the Senate Finance Committee on September 30, and if you get the chance there's a public link out there that will allow you to hear the points of view of leading senators from all around the nation, as well as those people involved in the GAO which is the controllers, the US Comptroller's office. But in a headline, we have seen no shift and no aggressive growth of Earned Income Tax credit in our DIY business. It's basically grown in line with e-filing overall. So the data that we see does not suggest there's been a shift of Earned Income Tax credit from one model to another. As you know, we are in the assisted business with our ProTax products, and we're in the do-it-yourself business with TurboTax. With that said, we are collectively as an industry looking to get rid of tax fraud in all of its shapes and forms, and so we are running experiments with the Department of Treasury as we speak. And we're trying to run experiments to say how can we continue to make sure that people who deserve earned income tax credit can get those subsidies, and how do we make sure that no bad guys can get into that system and try to defraud the system. And I like some of the pilot work we are doing, and we're sharing that across the industry as well. So the net-net on this is, it's going to be hard to know until we get into the season, whether we are collectively being successful in stopping Earned Income Tax credit fraud. But I would encourage you and anyone out there who has a question about whether there is a shift between assisted or do it yourself, to go look at the link that the Senate Finance Committee actually debated for quite some time, around this earned income tax credit, because you will hear facts out there as represented by the government, that would help everybody understand how we're collectively trying to line up and fight this. The second piece was around Ryan's simplification efforts, the house speaker, and in a headline, we are for tax simplification. We have been from day one, quite frankly, that's what our business is. Trying to take a complicated tax code and make it simple for people to comply with, and to be able to get their tax obligations done, and obviously, to get the money back in their pocket if they overpaid. It will be very hard to tell whether this is the year that something happens or not, but we hope so. Because at the end of the day, the simpler it is for the tax people to file their taxes, the more willing they're going to say, maybe I can do this on my own, and we think that only bodes well for the do it yourself category overall. And so, we're hopeful that something will happen. At the same time, if it doesn't, we're in the job of simplifying it for the consumer, and that's what we're going to continue to do.

Thanks, Brad.

Thank you, Michael.

And gentlemen, I'm not showing any further questions. Would you like to close with any additional remarks?

Yes, Latif, I would, thank you. And I want to thank everybody for your questions. Obviously, we're off to a strong start, but we have plenty of game left to be played. We're looking forward to the upcoming season, both the peak period in tax, as well as the continuation of QBO and our small business ecosystem. We want to wish everybody out there a safe and happy holiday season, and we're looking forward to talking to you soon. So thanks for the questions, and we'll speak with you next time.

Ladies and gentlemen, thank you for participating. This concludes today's conference call.+