Intuit's (INTU) CEO Brad Smith on Q2 2015 Results - Earnings Call Transcript

Feb. 19, 2015 11:13 PM ET  |  About: Intuit Inc. (INTU)

Intuit Inc. (NASDAQ:INTU)

Q2 2015 Earnings Conference Call

February 19, 2015 4:30 PM ET


Matt Rhodes – Vice President-Investor Relations

Brad Smith – President and Chief Executive Officer

Neil Williams – Senior Vice President and Chief Financial Officer


Brent Thill – UBS

Greg Dunham – Goldman Sachs

Walter Pritchard – Citi

Sterling Auty – JPMorgan

Ross MacMillan – RBC Capital Markets

Kartik Mehta – Northcoast Research

Raimo Lenschow – Barclays

Brad Zelnick – Jefferies

Gil Luria – Wedbush Securities

Kash Rangan – Merrill Lynch

Jim Macdonald – First Analysis

Scott Schneeberger – Oppenheimer

Jennifer Lowe – Morgan Stanley

Michael Millman – Millman Research


Good afternoon. My name is Sayeed and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit’s Second 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. [Operator Instructions]

With that, I would now like to turn the call over to Mr. Matt Rhodes, Intuit’s Director of Investor Relations. Mr. Rhodes, you may begin.

Matt Rhodes - Vice President-Investor Relations

Thank you, sir. Good afternoon and welcome to Intuit’s second quarter fiscal 2015 conference call. I am here with Brad Smith, our President and CEO; and Neil Williams, our CFO.

Before we start, I’d like to remind everyone that our remarks will include forward-looking statements. There are a number of factors that could cause Intuit’s results to differ materially from our expectations. You can learn more about these risks in the press release we issued earlier this afternoon, our Form 10-K for fiscal 2014 and our other SEC filings. All of those documents are available on the Investor Relations page of Intuit’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 have 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.

Brad Smith - President and Chief Executive Officer

All right, thank you Matt, and thanks to all of you for joining us. It has been an eventful few weeks at Intuit and I suspect you have lots of questions. Before we get to your questions, I would like to provide as much context around the recent events as possible while keeping the bigger picture in mind. The bigger picture is straightforward. Our financial results are strong through the first half of fiscal 2015 and we are reiterating our guidance for the full fiscal year. Furthermore, our small business momentum has taken a step rate change in a positive direction.

The growth in our QuickBooks Online subscriber continuing to accelerate at a very healthy rate. With that said, I know the tax is on everybody’s mind, given the time of year and the recent press coverage. So let me start there first. At the highest level, our tax strategy is on track. We are in the second year of a multiyear journey to achieve our product vision of taxes are done.

This year’s TurboTax significantly expanded its data import capability. Nearly 75% of customers can now digitally import W2s directly into the product that is up from less than 30% last year. This is a huge step towards our vision if taxes are done, making tax spreads easier and more accurate and this has led to several points of improvement and conversion for customers who choose to import their data.

The TurboTax experience now uses more advanced data driven insights to tailor the interview to your unique situation. We refer this as responsive experience and is saving significant time and questions off of the average taxpayers preparation experience. In addition, TurboTax users can now seamlessly move across platforms, working online on tablets or on smartphones with the ability to start, stop and continue their taxes on the device of their choice.

And for the first time ever Americans with more straightforward tax needs were able to file both their Federal 1040A or 1040EZ returns as well as their state returns for free. This was a powerful offer for this 60 million Americans, many of whom with paycheck-to-paycheck and count on their tax refund as being the biggest paycheck that they will receive in the year.

The collective impact of these innovations is showing up in the customer experience. So far this season, our ability to convert those who visit the TurboTax.com website and to those who file a return is up a couple hundred basis points. This improvement is on top of a big advance in conversion that we drove last year as well.

Our net promoter scores for TurboTax Online are also up about a half dozen points, which is quite encouraging. This improved product experience is helping reduce customer care calls, which were down roughly 20% year-over-year. And when it comes to the Affordable Care Act, we worked hard to ensure that all tax payers could easily and accurately meet the new ACA requirements with TurboTax.

Unlike some other tax services, TurboTax includes all the necessary healthcare forms for free. We don’t see any evidence that ACA is driving TurboTax customers to other tax prep solution. In fact, the ACA section of our product has been one of our highest converting tax topics this year, which gives us confidence that our ACA implementation is meeting our customers’ needs.

Translating the sum total of these initiatives, total TurboTax units grew 11% through February 14 versus the comparable prior year period. TurboTax Online units are up 19%, while TurboTax Desktop units are down 7%, which takes to me the recent events of the past few weeks, which has not been our best in terms of customer confidence. There were no excuses when you make a mistake and we owned our mistakes and taken steps to make things right. At the same time, we’ve been at the forefront of the ongoing battle to fight fraud in the U.S. tax system, navigating lots of misinformation along the way.

Let me share some important context around both of these events. First, let me address the change to the TurboTax Desktop product lineup, which we subsequently reversed. We didn’t live up to our customer expectations and our net promoter scores are down for the TurboTax Desktop product as a result. So why do we make the change in the first place and what have we learned from the experience.

I don’t need to tell anyone on this call that we are in the midst of a massive platform shift of the cloud, and every established technology company is dealing with the balance of serving customers on legacy products while advancing their efforts and serving new customers on the next generation platform. It’s no longer a desktop software world. Our computers no longer come equipped with optical drive and shelf space allocated software is down 50% in retail stores over the last five years. But that said, a subset of customers simply do not want to move to the cloud. Many of these are long-term loyal customers, who have used the same product for 20 years, which is why we've always been steadfast in our position that we won’t push a software delivery model on a customer.

With that context what happened? Well, last year, we had moved to a complexity baseline up in our TurboTax Online portfolio, steering customers to the best offering for their particular tax situation. This included moving Schedule C, D, E, and F from the looks into our premier and our home and business solution. These are the schedules that enable to file or to report items such as investment gains and losses and small business expenses.

Our goal was simplification. So customers were clear, which product was right for their particular tax needs. For over 20 million online customers last year, the implementation went smoothly. So this year, we thought to complete the alignment by making similar changes to our desktop offerings. Our goal was to streamline product development and bring any new innovation from our online product back to our desktop customers as well. And for those who might eventually choose to migrate to the cloud, they would enjoy a consistent and familiar product experience. Good intensions but misinformed.

These loyal long-time desktop customers simply didn’t want a different product experience. And they certainly didn’t want to have to upgrade and pay a higher price for the functionality that they have always had in the looks. In addition, we didn’t make the communication clear enough and we didn’t make the transition easy. For the 3% of TurboTax customers who were affected, it was simply unacceptable and they were right.

So here is what we’ve done. Following a very public and heartfelt apology, we announced that next year, we will offer the TurboTax to looks Desktop software that our customers know and love, restoring all the forms that they've counted on for years. Returning Deluxe desktop customers who need to upgrade this tax season are now able to do so seamlessly within the product for free.

More importantly, what lessons did we learn? First, know the customer. We're a customer back company and we didn't effectively apply our own expertise to this situation. Second, ease to transition; if you're going to make product changes, make sure you have early dialogue with the customers and make the transition slowly. And finally, act quickly and decisively. When you hear noise, assume smoke means fire and jump on the situation fast.

Which takes me to the more recent news surrounding the concerns of increasing fraudulent activity in the U.S. tax system, particularly at the state level. As we have shared on many occasions, the privacy and security of our customers’ data is the top priority in our Company. We've been working for years to apply the most advanced technologies and techniques to ensure the safety and privacy of our customers’ information and we have been doing this in conjunction with the overall industry and with government as well.

I was just in Washington three weeks ago, giving a key note to more than 100 policy leaders on this very topic. In more recently, Intuit and some states saw an increase in suspicious filings. As a result several states communicated their intention to stop accepting TurboTax e-file. So we took the precautionary step on Thursday, February 5th to temporarily pause the transmission of e-file state tax returns for all states.

After our preliminary examination of the recent activities with the help of a third security expert was concluded. We believe and we continue to believe these instances of fraud did not result from security breach of our systems and the information being used to file fraudulent returns was obtained from other sources outside the tax preparation industry.

We implemented targeted security measures to combat the type of fraudulent tax activity that we were seeing. These additional steps included the implementation of more advanced multi-factor authentication, which is a proven technology for protection against identity theft. With these measures in place, we resumed e-filing with the state the next day. Once, we felt comfortable that our customers’ privacy and security were not at increased risk.

And we're continuing to work with the state as they build their own anti-fraud capabilities and we will continue to share best practices as we work towards the common best interest of the taxpayer. To assist any customers, who are victims of tax fraud, we’re providing a dedicated toll free number with direct access to specially trained identity protection agents, who will provide comprehensive support and filing assistance. So to summarize consumer tax, the underlying health of the business and the product innovations that we're delivering are having a meaningful impact on the customer experience and on our result season today.

With that said, we suffered a self-inflicted wound on the desktop line-up situation, and we are leading the battle against an industry wide threat of cyber fraud targeting the US tax system. And all of this happened within the first few weeks of a 100 day tax season. But there is plenty of time left on the clock and if you look at the scoreboard so far, you'll see that the IRS data through February 6th shows that self-prepared e-file growth was up 70%, contrasted with assisted e-files down 4%. This leads us to believe that the do-it-yourself software category continues to gain share.

TurboTax e-file growth and other third party data also indicate that we’re gaining a couple points of share so far this season. So we’re keeping the bigger picture inline and we’re going to emerge from both of recent situations wiser and even more focused. Which takes me to the pro-tax side of the business, where we’re seeing positive early trends and customer acquisition. In addition, we’re delivering more innovation in pro-tax than I have ever seen in my time at Intuit.

We provided tools and training for our pro-customers to manage the ACA situation and to help their clients achieve the best possible outcomes. We’ve refreshed TurboTax Personal Pro, which we used to call CPA Select, and we expect the new interface and the accountants’ engagement tools to drive growth. We’ve launched Intuit Link, a data and document collaboration tool for accountants that save time and simplify the accountants to client communication and we’ve enabled eSignature capabilities that help accountants streamline their work and securely transmit signatures on important forms.

I realize that I don’t need to remind anyone that it’s early in the season for both of our tax businesses, but I will. We’re staying agile and I am very pleased with our products and our pace of innovation. We’re focused on improved execution and delivering for our customers and shareholders for the remaining season.

Now, let’s talk small business. As I foreshadowed earlier, the QuickBooks Online ecosystem continues to build strong momentum. We grew total QuickBooks Online subscribers by 50% in the second quarter that is up from 43% growth last quarter. We added 100,000 QBO subscribers quarter-over-quarter and we now have 841,000 paying subs worldwide. Outside the U.S. QuickBooks Online subscribers were up more than 170% to a 127,000 in line with last quarter’s rapid growth. Our QuickBooks Online customers continue to add payroll and payment solutions at a healthy clip.

In the U.S., our new customer online payroll attach rate was 21%,. This is a step down from roughly 30% last quarter, but it’s due to a change from an opt-out payroll signup to an opt-in. We expect our attach rate to be in the low 20s over the next few quarters but we expect to see improvements in retention as a result of this change. Our online payments attach rate was 8%, which is up from 7% a year ago.

To help fuel our international growth, we made two acquisitions in the past quarter that will add key features and functionality to the QBO ecosystem and targeted geographies. In the UK, we acquired Acrede, a provider of payroll solutions with global compliance and data security. They are easy to use cloud technology can be customized to deliver payroll across multiple geographies. We also acquired ZeroPaper, a developer of fast and mobile financial management tools for entrepreneurs and micro businesses in Brazil.

In addition to these acquisitions, we launched QuickBooks Self-Employed, designed specifically for the rapidly expanding population of freelancers and independent contractors. As you may recall, there are roughly 12 million of these businesses in the U.S. Our QuickBooks Self-Employed Solution helps the smallest of small businesses, manage their finances throughout the year, and provides integration with TurboTax to simplify tax reporting.

These sole proprietors generally don’t see a need for all the functionality and traditional QuickBooks online. They simply need to keep their personal and their business expenses tracked and separated for tax time. This product is gaining real momentum and I’m excited about the partnerships we recently announced with Stripe, Uber, Lyft, TaskRabbit, and others all centered around this particular market. We’ll continue to add partners to expand our presence in this rapidly growing on-demand services marketplace. So in total, it’s been an eventful first half of the year and it has been a strong first half as well.

I’m inspired by our team’s commitment to overcome obstacles, while continuing to reimagine the tax prep experience in both our consumer and our pro-tax businesses and you’re going to see much more innovation from these teams over the next few years. On the small business half of the house, our small business subscriber growth is accelerating and we remain focused on global customer acquisition, all being powered by cloud-based services.

With that overview, I’m going to turn it over to Neil to walk you through the financial details.

Neil Williams - Senior Vice President and Chief Financial Officer

Thanks, Brad. First, I'll start with overall company results, which all came in higher than our guidance. For the second quarter of fiscal 2015, we delivered revenue of $808 million, up 3%, a non-GAAP operating loss of $20 million, a GAAP operating loss of $98 million, a non-GAAP loss per share of $0.06, and a GAAP loss per share of $0.23. These factors reflect our strategic decision to deliver ongoing services and releases for future desktop offerings. As a result, revenue for future desktop software licenses will be recognized as services are delivered rather than up-front.

As we discussed previously, approximately $400 million in revenue will move out of fiscal 2015 into later years. The impact and quarter seasonality of this shift varies by business unit. The business with a shift is hardest to understand from an external perspective is probably professional tax. I’ll provide some data to help with modeling of the pro-tax business in a moment.

Turning to the business segments. Total small business group revenue declined 1% for the second quarter. Again reflecting the impact of changes to the desktop product resulting in ratable, rather than up-front revenue recognition. QuickBooks total paying customers grew 20%. Small business online ecosystem revenue grew 26% and customer acquisition in our online ecosystem continues to drive growth. QuickBooks online subscribers grew 50%, accelerating from last quarter’s growth rate. Online payroll customers grew 23%, online active payments customers grew 3%, and online payments charge volume grew 20%, driven by an increase in charge volume per customer. Payments customers attached to QuickBooks Online grew over 90%. We’re focused on growing payments in the QBO ecosystem while de-emphasizing other services such as standalone GoPayment’s customers. Rounding out the online ecosystem, Demandforce customers grew 18%.

Our primary goal is converting non-consumption to capture a larger share of the 29 million small businesses in the U.S. and millions more around the world. To do this, we’re leaning into QuickBooks Self-Employed which is part of our QuickBooks Online lineup as – and is included on the QuickBooks Online Subscriber line on the fact sheet. We had approximately 4,000 QuickBooks Self-Employed paying subscribers at the end of the second quarter. We’ll continue to call out the growth of this subscriber base over the next few quarters.

Moving to the desktop ecosystem, QuickBooks desktop units declined 26% in the second quarter as we continue to emphasize QuickBooks Online. More than 80% of our new QuickBooks Online customers are new to QuickBooks rather than migrating from desktop. Within the consumer group, consumer tax revenue was up 54% versus the second quarter last year as we benefited from an earlier start to the tax season this year. As you may recall, last year IRS opened e-file on January 31, pushing revenue into our third fiscal quarter, so this year we’re returning to a more normal seasonal pattern.

Our strong unit growth today benefited from our Absolute Zero Promotion, and our paid mix was also a bit better than we expected. In the back half, we face a tougher compare, but we still expect units to grow faster than revenue for the season. ProTax revenue was $11 million, down 69%. As we previously discussed, we expect a revenue shift of $150 million from fiscal 2015 to fiscal 2016 due to changes in our desktop offerings. To help with your modeling, we expect ProTax revenue of about $125 million in the third quarter of 2015 and about $100 million in the fourth quarter.

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%. With approximately $1.4 billion 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 second quarter, we competed two acquisitions, bring us to a total of four transaction so far this fiscal year, totaling approximately $90 million.

We’ve also repurchased $555 million of shares in the second quarter with about 1.2 billion remaining on our share repurchase authorization. We intend to be in the market consistently during the year. Our board approved a $0.25 per share dividend for our fiscal third quarter, payable on April 20th. 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.

Looking ahead, we have reiterated our financial guidance and raised our QuickBooks Online subscriber guidance for fiscal 2015. We also provided guidance for the third and fourth quarters and you’ll find our guidance details in the press release and on our fact sheet. As a reminder, we will provide our next tax unit update in April, soon after the tax season ends.

And with that, I’ll turn it back to Brad to close.

Brad Smith - President and Chief Executive Officer

All right, thanks Neil. I know we’ve taken sometime here to cover a lot of turf, but I hope it’s been helpful context in advance of your questions. We have a lot of opportunity in front of us and at the end of the day, it all comes down to great people and I like what I see in our company’s culture and in our employees. It is truly my privilege to be able to serve alongside them each everyday.

So with that, let’s open it up to you to hear what’s on your mind, Sayeed?

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from Brent Thill from UBS. Your line is open. Please go ahead.

Brent Thill - UBS

Good afternoon. Brad, on the tax side, you mentioned the conversion rate went up year-over-year. I’m just curious if you could give everyone a sense of what that conversion rate is today and what do you think you can do to continue to drive those conversion rates going forward?

Brad Smith - President and Chief Executive Officer

Yes, Brent, thanks for the question. First of all, we would like to wait till the end of season and then at Investor Day we will share with you the year-over-year comparison and conversion rates and one of the reasons we want to do that is we’re getting better every week. One of the things I mentioned in the opening remarks is the responsive experience, which is our ability to actually look at the kinds of information that we can see in your tax return and compared to others like you and truly streamline the interview process. And so that’s enabling us to get more conversion out of people who are coming in and starting to return and getting them all the way through the end where they actually hit the send button.

The other thing that we’re able to do here is we’re looking for areas where there were historical problems with entering data and then with the electronic import capabilities that we continue to advance. We’re getting a lot of that work done for you so reduces friction and it is a combination of those things, which we call the taxes are done, which is really improving our conversion and I will tell you the teams truly are making improvement week over week and we will see how we finish up the season.

Brent Thill - UBS

Great. And just real quick for Neil, given some of the renewed focused on the cyber issues that are going on in the industry, there is certainly been a lot more investments that the companies have been having to make to protect themselves. I would assume given you haven’t changed the year on the bottom line that many of these increased investments around the cyber trend there are included in your guidance?

Brad Smith - President and Chief Executive Officer

Yes, Brent, clearly that is a very important issue for us and so we are providing all the funding that we need in those areas. Anything that was not included in our guidance for the full year, we expect to reallocate from other investment opportunities within the company. So we have given a lot of thought and consideration, before we reiterated guidance for the full year.

Brent Thill - UBS

Thank you.


Thank you. And our next question comes from Greg Dunham, Goldman Sachs. Your line is open. Please go ahead.

Greg Dunham - Goldman Sachs

Hi, yes. Thanks for taking my question. One more on tax, I mean clearly the numbers surprised as to the upset, especially given some of the bad press that we’ve seen in the market. Can you talk to whether or not that actually has been head wind to the business? And if it has what has more than offset that you mentioned conversion. But what are some of the other areas or we are just assuming that the headwind on some of the bad press is just overblown? Thanks.

Brad Smith - President and Chief Executive Officer

Well, Greg, first of all we are not Hollywood and so unlike Hollywood for all PR is good PR. We certainly don’t like to have negative press out there about our product or have any of our customers frustrated. I think the first piece is the desktop lineup changes, we knew we made a mistake when we started hearing the feedback from the customers. But it’s important to understand that affected 3% of our TurboTax customers. So while the noise was out there and the press coverage was pretty strong, it really wasn’t a significant number of customers. And we worked really hard to get in touch with each and every one of them and to they make it right.

And so I’d say first of all the scope of that wasn’t a significant as the press may have played it out to be. But from our perspective we took it very seriously, because every customer matters. And the second is on the industry-wide threat of cyber fraud attacking U.S tax system. This has been an industry-wide challenge. It is not a company specific challenge, despite some of the early press clippings, whether you look at our own competitors issuing open letters from their CEO and major newspapers. Or you know the IRS has been working with the industry since 2012 to solve this or even the state of Montana issuing in some press release last week, saying, hey this is happening to more than one company.

I think most people understand that we are progresses, we are applying the most advanced techniques and at the end of the day they trust into it that we are going to process their information and protect the privacy and security. So I think the important thing here is the issue of cyber fraud is a threat to the tax system. We’re one of the many players that want to be a part of the solution, but you have to separate the signal from the noise. The press is not representative of what we’re seeing and as a result I think what you’re actually seeing in our business results, our customers trust our brand, our product is even much better than it was last year, so we’re improving conversion and that plays out in the marker place and that’s why you see stronger tax results then maybe what the press might may have led you to believe.

Greg Dunham - Goldman Sachs

Great, thanks Brad.

Brad Smith - President and Chief Executive Officer

All right. Thank you, Greg.


Thank you. Our next question comes from Walter Pritchard from Citi. Your line is open. Please go ahead.

Walter Pritchard - Citi

Thanks, Brad, I’m wondering on the – you had a nice acceleration in the QuickBooks Online subscribers and you added about 100,000 in your guidance for the third quarter actually assumes you fewer than 100,000. If I look at prior desktop seasonality, back when it was a pure desktop business, you’d actually see a nice pickup from Q2 to Q3 in terms of subs. I’m just wondering is the seasonality change or is there some factor that you think drove Q2 that is a repeatable as we look into Q3 for sub adds.

Brad Smith - President and Chief Executive Officer

We know that each of our businesses do have cycles to them and in small business we do see a larger group of people buying heading into the New Year. And then it tends to tail off a little bit into the latter half of that, our fiscal year, so heading into the spring and summer. The desktop will throw you a little bit out of whack there QBO was more of a realtime consideration and you have a mix today of more service based businesses, because we’re still building out advanced inventory to the mix of the kind of customer and QBO is slightly different than desktop.

But right now what you are going to see is – we’re still in the early learnings of just how big QBO will be in each of the quarters. This is our best forecast for the fourth quarter and it really reflects the slightly nuance differences and the service based customers in QBO versus more inventory based in desktop and the second is there is a seasonal pattern to win the peak periods are for QBO, just like there is and some of our other businesses.

Walter Pritchard - Citi

And just Brad, a follow up on that. So you given a number I think out of fiscal 2017 of two million subscribers and you talked about – about two thirds I’m sorry three quarters of those coming in though new customers and I’m wondering if what you learned in the second quarter especially on that last part the mix of customers coming in new versus installed based conversion, if there is any change in your view in terms of the long-term?

Brad Smith - President and Chief Executive Officer

At this time Walter, we’re not changing that long-term view, that two million subs, our aspiration is not only to meet that but to exceed it. We’re continuing to see strength in new to the franchise customers and this particular quarter 80% of QBO customers were new to the franchise; about 20% were migrators from desktop. We’re doing everything we can to get desktop customers comfortable, we’re adding that advanced inventory capability, or continuing to finish off things like job casting, we’re running promotion, but as you learned from the TurboTax desktop experience I just walked through.

Some of these customers aren’t going to be move in anytime soon and we’re fine with that, what we really like to see is we’re expanding the category, we’re getting new people into accounting software that never even used our product before. So right now, we are locked in on that 2 million number. And we just raised our forecast on subs this year. So we are not moving that 2 million yet. But if we continue to close in the way we are, we’ll talk to you about that in the future.

Walter Pritchard - Citi

Great. Thank you very much.

Brad Smith - President and Chief Executive Officer

All right. Thank you.


And our next question comes from Sterling Auty from JPMorgan. Your line is open. Please go ahead.

Sterling Auty - JPMorgan

Yes, thanks. Hi Brad, you mentioned the ACA was not causing TurboTax users to leave to tax prep. I think the bigger concern that I hear from investors is whether you install to share shift in DIY. Given your prepared remarks it sounds like that is not the case I’m kind of curious if that just where we are in this part of the tax season and maybe that changes or is there something that you’re seeing that the ACA just isn’t having any impact on that, kind of category shift.

Brad Smith - President and Chief Executive Officer

Sterling, it’s a fair question. And I think it’s still out there for many to think through. Our assertion from early on if you look to what happened in Massachusetts back in the days when Romney was governor. There was no shift between tax prep methods when a light program was introduced at the state level so our hypothesis was if we do our job, and we take the complexity and make it simple. This should not be a catalyst to the assisted category. And we worked really hard to do that.

I think, the second thing is, we do know that as you go further end of season, you will see the assisted tax prep methods start to pickup a little bit as more complex returns get processed. But right now, this is about where we were this time last year with the assisted category growth through February 6 reported by IRS and then also where the DIY category was. And at the end of the season, the DIY category picked up a little bit of share. So I believe we are going to see the same thing happen this year.

My last point I would say is, we anticipated, if there was going to be a big impact that ACA would impact earlier in the season. Because when you look at those, you don’t tend to have health insurance, there are often times those families that are living paycheck to paycheck they need to file early to get their refund. And the fact we haven’t seen the kind of shift that some of the industry we’re suggesting was going to happen, leads us to believe that our original hypothesis looks like it’s going to play out. We don’t expect this to be a catalyst. But we also were prepared to respond if anything changes based upon that, the balance of the season.

Sterling Auty - JPMorgan

Okay. And then just one follow-up and you touched upon in your answer there. Can you help us understand given the timing differences on when returns are starting to be accepted et cetera. We end up with a lot of numbers over different periods of time. So lot of apples and oranges kind of reiterate for us what you think the tax season growth will be for the tax business? And kind of what the results that you just reported meanings in terms of hitting those goals?

Brad Smith - President and Chief Executive Officer

Yes, Sterling. Also two things here IRS data through February 6, reported the category the self prep DIY category, digital category with that seven and system is down four.

If I take our numbers and right now we reported the February 14th, if I move them back and make them apples-to-apples, the number of e-filed returns we submitted through the same date the IRS put their data out, we’re up 13%. So right after that, you can just do the math and say, okay, we’re growing 13, the categories growing 7, it looks like TurboTax is picking up some share. And that’s kind of where we were last year too.

If you step back and look at our assumptions for the full season, our forecast were based upon the IRS total returns growing about 1% and right now that’s what the IRS has reported so far through February 6. The second as we anticipated that the do-it-yourself category would pick up about a point of share out of the total returns filed. Right now through the results of February 6th, it’s up almost 3 points. So it’s a little bit higher than that, but we know it works through the balance of the season, it does start to shift a little more to assisted, so that'll come down a little bit if history plays out.

The third lever we assumed is that we would pick up share and so far the data suggest that we picked up several points of share, but we also know we came off of a very exciting program called Absolute Zero. So we’re going to say if we can hold our ground for the balance of the season and the last pieces revenue per return. We fully expect the customer growth will outpace revenues. We don’t expect that to be a big catalyst and that adds up to the 5% to 7% total guidance we gave for consumer tax. I know there is a lot in there, but I hope that parse the numbers out and gave you apples-to-apples of us versus the IRS and then what our assumptions were.

Sterling Auty - JPMorgan

That was perfect. Thank you guys.

Brad Smith - President and Chief Executive Officer

You’re welcome.


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

Ross MacMillan - RBC Capital Markets

Thanks a lot. I have two, so first on consumer tax, a lot of price changes this year across the portfolio. And Brad you’ve said a couple of times, you expect units to grow faster than price,. But by my math so far this season it looks like revenue per unit is a bit higher than last year and I’m a little surprised that just because you’ve obviously got the Absolute Zero program going on. Any comments on that – is my math right and any thoughts around that so far?

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