Intuit Inc
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Intuit Inc
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Good afternoon. My name is Jerome, and I will be your conference facilitator. At this time, I would like to welcome everyone to Intuit's Third Quarter Fiscal Year 2019 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 session period. [Operator Instructions]
With that, I will turn the call over to Jerry Natoli, Intuit's Vice President of Finance and Treasurer. Mr. Natoli? The floor is yours.
Thank you, Jerome. Good afternoon and welcome to Intuit's third quarter fiscal 2019 conference call. I am here with Intuit's CEO, Sasan Goodarzi; and Michelle Clatterbuck, our CFO.
Before we start, I would 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 2018, 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 these remarks 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.
With that, I will turn the call over to Sasan.
Thanks, Jerry, and thanks everyone for joining us. We had a great third quarter and we’re on track to exceed the guidance we provided at the beginning of the year. We’re seeing momentum across every part of the Company and as a result raising our revenue, operating income and earnings per share guidance for fiscal 2019.
During the third quarter, total revenue grew 12% overall, fueled by 10% revenue growth in the consumer group and 19% revenue growth in the Small Business and Self-Employ group. With that context, let me start with the consumer group.
We had a great tax season. We grew the DIY category and grew our share within the category driven by our innovation and significantly improved customer experiences. We produced our most robust free offering and a significant progress from our effort to transform the assisted category. As we communicated, there are four primary drivers in our consumer business.
The first is the total number of returns filed with the IRS. The latest IRS data indicates total returns were up 0.2% through May 10, below historical trends and our own expectation of 1% to 2% growth.
The second is the percentage of those returns filed using do-it-yourself software. Category share grew over a point. The fastest pace since 2016 once again outpacing the assisted tax prep category, we are very pleased with this outcome. And as a reminder, DIY category growth is our largest revenue growth driver.
The third driver is our share within DIY. We estimate TurboTax Online share grew half a point. The fourth is our average revenue per return which increased again this season. The growth reflect a stronger contribution by TurboTax Live, improved attach and tuned product line adjusted for the new tax legislation.
These items were partly offset by deliberate decisions we made to improve the experience for customers with simple returns, including the year-over-year data transfer from no charge and extending free state filing for the entire season. This season we had more customers than ever before paying nothing.
We grew this customer growth in the high teens above total unit growth of 5%. We are confident these were the right strategic decisions to drive durable growth especially as we look for way to help customers make end meet going beyond taxes.
Our commitment to provide a robust free offering is resulted in more than 55 million TurboTax customers, who paid nothing for their TurboTax experience over the last 5 years. As I shared before, our consumer grew strategy is to expand our lead in the DIY category, transformed the assisted tax preparation category and destruct traditional consumer finance by expanding beyond tax to build the customer platform. This is all-in service with helping our customers need and maximizing their tax refund. We made significant progress against these strategic objectives this season.
Within DIY we saw evidence that the bold changes we made to improve the experience for customers who file simple returns, resonated. These changes drove a 6 points improvement in product recommendation scores for the free offering and contributed higher retention. We're transforming the assisted tax customers experience by connecting people to experts on our platform with TurboTax Live.
We introduced a range of price points within the product line this season to offer access to an expert for even the simple returns. After just two years, TurboTax Live is now a meaningful contributor to our business and this product line is among the fastest ever to reach this revenue level. The number of customers using TurboTax Live is more than tripled year-over-year.
We estimate 70% of customers who are new to Intuit this season and use TurboTax Live came from the assisted method the prior year, higher than TurboTax Online. And for the approximately 2,000 pros on our platform, we improved the on-boarding experience and technology tools, resulting in lower attrition and improve operating efficiencies through the season compared to last year.
TurboTax has now approximately 28% share of total individual returns, leading us with a large addressable market. Beyond tax, our consumer platform is aimed at helping customers to unlock smart money decisions by connecting them to the financial products to help them make ends meet. As we learn about their financial life, we can notify them a benefit that can save them money.
We now have over 14 million customers registered for Turbo, up from 5 million last season. We have approximately 70 offers this season focusing on four verticals, including credit card, lending, investing and mortgages. We continue to test benefits and monetization models. While we don't expect a significant contribution to revenue in the near-term, we're making progress and continue to be excited about this opportunity. In summary, I'm very proud to what the team delivered across the consumer offering.
Now let me turn to Small Business. We delivered another strong quarter in our Small Business and Self-Employed group with online ecosystem revenue growth of 38%, again exceeding our target to grow better than 30%. We continue to place an increased emphasis on online services to deliver more value for our customers by solving their biggest pain points.
We're working to achieve our vision of being the center of Small Business growth by helping our customers get paid fast, manage capital and pay employees with confidence. Earlier this year, we launched next business day payment, allowing our customers to receive their funds much faster than previously experienced. QuickBooks Capital has funded $360 million cumulative loans since launching around a year-and-a-half ago.
Finally, we remain encouraged by our early progress with QuickBooks Advanced Online, designed to disrupt the midmarket by investing in the midmarket Small Business customers with 10 to 100 employees. Within our strategic partner group, our professional tax revenue is on track to grow 4% for fiscal year 2019, that’s the high end of our initial range for this segment. To wrap this session up, we are very pleased with our results.
Now, let me shift to a different topic. You may have heard assertion that Intuit engaged and practices design to discourage consumers from following their tax for free. These assertions have come in several forms and I want to address them directly. We stand behind our marketing actions as both being appropriate and consistent with our core value, integrity without compromise.
In addition, any suggestion that Intuit does not support the IRS Free File Program is wrong. In fact, we’re proud that for nearly two decades millions of Americans have used TurboTax Free File Program to file their taxes without paying. Our commitment to free based back to 1998 when we launched a program to offer free tax preparation software and e-filing services to lower income and active duty military tax payers.
In 2002, the entire tax software industry and the IRS formed the IRS Free File Program model after our initiatives. As a founding member, we’re committed to IRS Free File shared goals of public service and providing free tax filing to those who needed most as we have for nearly 20 years. As I mentioned earlier, we have more than 55 million TurboTax customers who paid nothing for their TurboTax experience over the last five years. Thank you.
And now let me hand it over to Michelle to walk you through the financial details.
Thanks, Sasan. Good afternoon everyone. For the first quarter of fiscal year 2019, we delivered revenue of $3.3 billion up 12% year-over-year. GAAP operating income of $1.8 billion versus $1.6 billion a year ago and 11% increase. Non-GAAP operating income of $1.9 billion versus $1.7 billion last year and 11% increase. GAAP diluted earnings per share of $5.22 versus $4.53 a year ago, up 15% increase and non-GAAP diluted earnings per share of $5.55 up from $4.78 last year, a 16% increase.
Turning to the business segment, consumer group revenue grew 10% in the fiscal third quarter. TurboTax Online unit grew 7% this season while overall unit increased 5%. We significantly improve the experience within TurboTax Live this season, not only for the customers to use this platform, but also for the tax pros providing tax advice. The improvements we put in place increased pro NBS by more than 50% versus a year ago and created operational efficiency.
These include a 30% reduction in pro attrition and improvements in the pro portal that drove a 30% increase in time spent serving customer this season versus last year. We’re excited to continuing scaling this business into the future. We also offer TurboTax Self-Employed customers the opportunity to benefit from tracking their financials throughout the year in QuickBooks Self-Employed. TurboTax Self-Employed product recommendation scores tie TurboTax Live for the highest score among our paid offerings.
Turning to the Strategic Partner group, we reported $235 million of professional tax revenue for the third quarter, up 4% year-to-date. In Small Business, total Small Business and Self-Employed revenue grew 19% during the quarter. Online ecosystem revenue remains strong with growth up 38%. We believe the best measure of health and success of our strategy going forward is online ecosystem revenue growth, which we continue to effect to grow better than 30%.
Online services year-over-year growth slow this quarter compared to the prior four quarters. This was primarily a function of lacking the TSheets acquisition a year ago. QuickBooks Online subscribers grew 32% and in this quarter with over 4.2 million subscribers. Growth remains strong across multiple geographies with U.S. subscribers growing 25% over 3.1 million and international subscribers growing 55% to over 1.1 million.
Within QuickBooks Online, Self-Employed subscribers grew to approximately 970,000 from roughly 680,000 one year ago. TurboTax is a significant channel for QuickBooks Self-Employed and 440,000 subscribers have come to this channel up from 330,000 last year. We continue to expect total subscriber growth to moderate as we place a greater focus on additional services and penetrating our broader range of customers.
Desktop ecosystem revenue was up 4% in the third quarter. Our Desktop units were up 12% reflecting unusually strong renewables during the quarter. During fiscal 2019, we expect the QuickBook Desktop units and Desktop ecosystem revenues to be roughly flat. Within the Desktop ecosystem, our QuickBooks enterprise customers and revenue continue to grow at a double digit pace in the third quarter. This further reinforces our interest in addressing the needs of mid market Small Business customers with our QBO Advanced offering.
Turning our financial principles, we remain committed to growing organic revenue double digits and growing operating income dollars faster than revenue. We take a disciplined approach to capital management, investing the cash we generate in opportunities that yield a return on investment greater than 15%. Our first priority for the cash we generate is investing in the business to drive customer and revenue growth. We consider acquisitions to accelerate our growth and fill out our product roadmap.
We return excess cash that we can't invest profitably in the business to shareholders via both share repurchases and dividends. We finish the quarter with $3.3 billion in cash and investments on our balance sheet. We repurchase a $135 million of stock in the third quarter approximately $2.8 million remained on our organization, and we expect to be in the market each quarter this year. The board approved a quarterly dividend of $0.47 per share payable July 18, 2019. This represents a 21% increase versus last year.
Turning to guidance, our fourth quarter fiscal 2019 guidance includes revenue growth of 10% to 12%, GAAP loss per share of $0.35 to $0.33, and non-GAAP loss per share of $0.16 to $0.14. We are also raising our fiscal 2019 guidance following strong performance the first three quarters of the year. Our new guidance includes revenue growth of 12%, up from prior guidance of 8% and 10%. GAAP diluted earnings per share of $5.72 to $5.74, and non-GAAP diluted earnings per share of $6.67 to $6.69. We now expect the GAAP tax rates of 18.5% for the fiscal 2019. You can find our Q4 and updated fiscal 2019 guidance detail in our press release and on our fact sheet.
And with that, I'll turn it back over to Susan
Great, thanks Michelle. With that overview of the quarter, I’d like to remind you of the strategic objectives I covered last quarter starting with what matters most to our customers. All of our customers have a common set of needs. They are all trying to make ends meet, maximize their tax refund, save money and pay off debt. And those who’ve made the bold decision to become entrepreneurs and go into business for themselves have an additional set of needs.
They want to find and keep customers, get paid, excess capital to grow and ensure their books are right. That’s why our vision is to power prosperity around the world and our strategy is the One Intuit Ecosystem, which focuses on unlocking the power of many for the prosperity of one. The evolution of our strategy is to become an AI-driven expert platform. This is about becoming an open-trusted and easy to build on platform where we and our partners solve the most pressing customer problems and deliver awesome experiences.
It's about significantly accelerating our application of artificial intelligence, which progressively learns from the large data set across the platform and accelerates speed the benefits to revolutionize the experience for our customers, and it's about solving the largest problem customers face, lack of confidence. By connecting on with experts on our platform, leading the digitization of the services industry, let me provide a few examples.
When it comes to connecting people to experts, we’re doing this today with TurboTax Live. Imagine the opportunity we have to expand live expertise across the platform to serve consumers, self-employed and small businesses in the areas of tax, book keeping and financial advices. For Small Business owners, we’re focused on being the center of Small Business growth, using AI across our platforms accelerate cash on funding and payments and to help our customers excess capital.
Overtime, we see an opportunity to better serve product based business as they find and sell the customers across channels transforming omni-channel commerce. We also focus on helping customers to make smart decisions with their money by connecting them to financial products that help with more money in their pockets. This is our vision for Turbo where we are increasing active use and engagement leveraging the tax refund moment to connect customers on our platform to meaningful benefits.
Last but not least, we’re focused on disrupting the mid market with QBO Advanced. Our AI-driven expert platform will help provide with mid-market customers need at a disruptive price. We are making great progress and we’ll have more to share with you in the coming quarters and at our Investor Day. I want to thank our employees, our customers and our partners for another strong quarter.
Now, let’s open it up for questions.
Thank you. [Operator Instructions] Your first question comes from the line of Keith Weiss from Morgan Stanley. Keith you are now live.
I want to touch on sort of the tax business this quarter and two kind of related next questions. One, you've talked about some reactions I guess took during the quarter. The sort of free state for the entire period as well as free data transfer that push more people into the free category. Can you talk to what is the rationale behind it? What is like the business reason for making those moves? Number one. And number two, we have kind of the read press reports, we've also seen some political sort of rhetoric starting to rise, a letter some senator sent to you today. Is there any reaction needed from that type of kind of political pressure? Is there any behavioral changes or anything you plan on doing differently in the TurboTax business in response to senator's pressure or is there pressure you're getting from some state local governments as well?
Great. Hi, Keith, thank you for your question. Let me start with what's matters most to our customers and as you've heard us talk about, there are two things that matter most to our customers. One is helping them to meet ends meet and the other is helping them to get the largest tax refund. In that context, our three areas that we're focused on, one is, expanding our lead and the do-it-yourself category. It's about transforming the assisted category and it's actually disrupting consumer finance and going beyond tax.
In that context, our focus in, in essence expanding our lead and the do-it-yourself category has been to ensure that we have the best product experience. And so what we did this year was very much in line with our strategic approach vary durable, which is to deliver the best free offering this year through the year-over-year data transfer for free and all to actually extending free for the whole year and including our state. And we did that because it gives us the opportunity to really help those that are underserved and those that struggle with the income that they make.
While at the same time, helping to transform the assisted category, this give us the opportunity as we grow our customers to ultimately find ways to help them, makes ends meet through the offerings that we have in Turbo. So, those were the drivers behind the decision and we're actually quite excited about seeing the results that we got, which is both customer growth and revenue growth. PRS is actually up over 8 points. Retention is up based on the decisions that we made.
So, all-in-all we feel very good about the decision and again it's in context of our durable game plan. I think the second thing that I would say is that, we have been supporters of free and in fact, as I shared earlier, this dates back to 20 years ago. And with respect to would there be any behavioral changes from us, our view is that, our focus has been to actually grow the do-it-yourself category and expand our lead in the category, one element of it being through free.
So, we don't actually see our behavioral is changing. We believe that we are focused on the right thing, which is delivering for our customers. And we'll continue to work on with industry and the IRS to see if there are ways that we can continue to improve Free File Program. But at the end of the day, our focus is on our customers and we believe that everything that we have been doing is very durable and very much in line with what's most important to our customers. And I actually have a lot of confidence in the actions that we're taking.
Your next question comes from the line of Brad Zelnick with Credit Suisse. Brad, your line is open.
Great. Thank you so much and I echo the congrats on a great tax season. Sasan, with TurboTax Live units more than tripling, it seems like there was a lot of success there and I know you shared some data points. But can you maybe just expand a bit more on the mix within TurboTax Live in terms of net new versus customers coming over from the existing base? And as well, if you can comment on the changes in the tax code and expectations around trade up, trade down and new filers coming in the franchise, how does that play out versus expectations?
Hi, Brad, and thank you for your questions. I think I’ll just go back to where I started just a moment ago, which is every twist that we are making is very deliberate and based on what we saw the season, it was really within our expectations. And our singular focus is to serve our customers and we want to do that through expanding our lead and do-it-yourself category, and we want to also do that from transforming the assisted category and helping all of those customers with benefits that goes beyond taxes.
With that as context, we’re very pleased with TurboTax Live performance this year. Given that we in essence gave our customers the ability to pick TurboTax Live through any of the skews. Our customers grow tripled, 70% of those customers that came in, the new ones were actually from the assisted category. The prior year for our pros, the net promoter was up 50%. They spend 30% more of their time serving customers this year compared to last year. So, we’re very pleased with our progress this year and we know exactly the areas to improve actually accelerate our growth in this area next year.
As it relates to the tax code, as you well know we are big supporters of tax simplification. We believe that it enable consumers to take more control over their financial life. It actually is a catalyst for do-it-yourself category and we needed to change our line-up this year to ensure that we delivered for customers given the tax still changes. And in essence what we saw was all really within our expectations and we’re very pleased with the performance for our customers are PRS scores and the teams have done a wonderful job.
Thanks, Sasan. And if I could just squeeze one in there for Mitchell, with consumer margin ticking down from prior Q3. And I know you’ve been fairly disciplined and consistent with how you think about acquisition costs and metrics like LTC act. But can you just remind us especially with TurboTax Live coming into the mix, how you’re thinking about acquisition cost? And how we should think about the cost of delivering TTL this season? And how we should really think consumer margins going forward?
So, Brad, I do this to Mitchell all the time in our meeting. So, let me start and then I’m going to turn it over to Mitchell. It's a great question and I know others have it on their mind. I wanted to go back to the evolution of our strategy, which is about being an AI-driven experts platform and this is about significantly accelerating our progress with a platform and an ecosystem. And when you think about our platform and ecosystem, we are actually building more and more of our services to be able to serve all of our segments. The examples would be the services that we fill across our ecosystem for TurboTax Live, four QuickBook Live, for CyberSecurity.
The data scientist that we hired that ultimately fuels our machine learning engine that drives our AI benefits for our customers. Those are all at the Company level, which is why we always talk about we manage the margins at the Company level. And therefore that’s really what’s important for you all to pay attention to, specifically in the consumer group our year-to-date margins are actually pretty much flat with last year, so we’re actually quite pleased with the progress. I don’t know if I left anything for the answer, but…
The only thing I would ask to that Brad is that. When we look at the consumer margins specifically there have been a number of questions just around TurboTax Live and how we think about that. We were able to grow the customers to react this year and yet we had pretty much the same number of pros, the 2000 pros that we had last year. So that's just demonstrate some of the efficiencies that I spoke about earlier, and the operational efficiencies and being able to increase customer serving time with our pros by 30%.
So, we actually liked the incremental margin that we're seeing for the offering, and we are we looking -- when we look forward, we're focused on opportunities here like automation and augmented intelligence. All of these things do look for ways to continue to make the agents as efficient as possible and also to continue to streamline the on-boarding process.
Your next question comes from the line of Kirk Materne from Evercore ISI. Kirk, your line is now open.
I wanted to just double click a little bit on your commentary around the platform, your expert platform powered by AI. Even clearly, we've seen some of the benefits of that with TurboTax Live. There's been some discussion on the website about QuickBooks Live and you guys testing that out. And I was just kind of wondering, how we should think about the evolution on sort of the Small Business side around that narrative? And I know you've actually given too many data points now [indiscernible] but what should we be expecting to perhaps at the Analyst day? Or give just some ideas about how we can kind of hold you guys? Or what we should expect for you all around this development of this narrative?
Great question. Thank you, Kirk. Couple of things I would say. One is we think about this opportunity, starting with what's most important to our customers. And the biggest challenge that our customers says, consumers, self-employed and small businesses is confidence. In fact, you've heard us talk over the years around the opportunity around non-consumption. One of the drivers as to why people don't switch is because they're looking to interact with a human being to help them, do their taxes, their bookkeeping and advice.
On the other side, we've got enrolled agents, pros and accountants that only serve customers within maybe a 10 to 15 mile radius max. And they don't like marketing and they don't like pursuing customers. And we believe that this inform a huge strategic opportunity, we have to connect people to experts, to really go after non-consumption, to help our customers make ends meet, to help them run their business and be successful.
So I wanted to start there because not only are we in the very early innings of TurboTax Live and what the opportunity that we have to transform the assisted category. That same opportunity exists when it comes to helping small businesses, get started and run their business. And we've been one, leveraging the same common services that we've built over the years for TurboTax Live to significantly accelerate, building out QuickBooks Live.
And we've been testing our QuickBooks Live over the last many months. And what we learned is very consistent with what we learned from consumers that are trying to do their taxes. They're looking for ways to get started and get set up. So, I am actually looking for advice of I have payroll due on Friday. I am not going to be able to make my payroll. What advice you have for me?
Some actually want the bookkeeper to actually take all their information, all their documents and set QuickBooks up for them and then give them advice. So, we're learning a variety of things and we believe that the opportunity of significance for our customers and the ARPU is actually quite significant because the benefit is there. I would say on the other side, as we've been talking to enrolled agents accountants and pros.
Once they understand what we’re trying to do, they are very excited about this opportunity because they see it as an opportunity to be able to grow their business but do improve focusing on what matters most to them versus marketing. And so the way we want all of you to think about this, this is a big opportunity for us to connect peoples to experts on our platform to go after consumers, self-employed, small businesses and fundamentally digitize the services industry and build advantage across the Company.
That’s really helpful. If I could just sneak in one for Michelle sort of related on that topic. As we think about sort of the need for your guys to build out more AI sources from low to this platform. I assume there’s advantages for you also work with AWS on that where you can take those leverage them as well as add people on your side, so that the narrative ongoing operating income passing revenue whole even as given this platform narrative unfolds over the next couple of years? Thanks.
Thanks Kurt, thanks for the question. Yes I mean when we talk about fitting on principals start there and those really are extremely doable and we are committed to growing organic revenue double-digits and operating income dollars faster than revenue as you mentioned. When you think specifically about something like the experts platform AI services on that yes we have employed and continue to employ as we talk about at Investor Day a number of data appliances who are coming in to really help us continue to develop this critical capability.
AWS is absolutely a keen partner with us. We’ve moved all our customer facing apps to it already, we’re continuing to move some of the back end stuff and we expect that to take and make another 18 to 24 months but they are absolutely a critical partner for us and we don’t see that having an impact when we look at growing operating income.
Your next question comes from the line of Scott Schneeberger from Oppenheimer. Scott you are now live. Scott Schneeberger, your line is now live.
I wanted to ask in the consumer segment, your margin, someone asked earlier it was a little larger than expected in third, but Michelle you've pointed out that year-to-date it was about on track with last year. So my question is, somewhat to the extent you could speak to this year you've marketed TurboTax Live in the early season, but you haven’t in early season last year. You also had the four tiers of pricing in TurboTax Live this year. So is there anything a unique or interesting about that that have an impact? And if you can elaborate a little bit on, what you saw introducing the four tiers year-over-year versus last year? Thanks a lot.
Thank you, Scott. Thanks for the question. Actually, where I am going to start is, is if I set back and look at TurboTax Live. Sasan did mention earlier that this year we made the very deliberate decision to offer it across our lineup. It's been enabled so from simple return although it's very complex return to be able to have access to expert to really get the confidence say need, to go through their tax filings situation. So with that, we believe that, that's absolutely the right thing for us to do and a right strategic decision.
We did see a lower ARPC in that, but we believe that long-term with the opportunity that we have in TurboTax Live that's a right thing to do for our customers. If I think back to just margins overall and we did talk about the consumer margins earlier. And when I think about just the CG margins in total there, we have marketed TurboTax Live this year at the very beginning of the season and we didn't do that last year. But we are continually making decisions around marketing decisions and where we apply marketing dollar and how we do that's around the tax season.
So there really wasn't anything dramatically different this year that would have impacted our margin. But once again, I would tell you, I wouldn't focused really on consumer growth margin, we really do manage the margins at a full company level on an annual basis in fact I really wouldn't really get to enough on what happen us to getting this season and end the season between months a quarters. I really was looking more from a company standpoint on an annual basis.
Thanks, understood. And then certainly Small Business margins were impressive on year-over-year basis. My follow-up is on the fourth quarter guide, it's down $0.16 to $0.14 year-over-year, that's the lowest guide in the fourth quarter over the last time we saw performance of that low was fiscal '10. I'm just curious is there, what are the drivers, is it timing or is it something that been impacting that. Thanks.
Thanks for your question. We actually feel great about the momentum of the Company and momentum of online revenue growth especially in Small Business, because that's the majority of our revenue in the fourth quarter. So, in fact, as I look back to the years that you are comparing, we have more momentum now than we did then. So I feel great about the momentum of the business, the innovation is coming out of the Company and what we guided. The last thing I would say, this could be comparing ASC 606 to 605 accounting and we believe that's probably lie your comparing numbers that may be look odd but in terms of what we're guiding to and momentum never been stronger.
Your next question comes from the line of Jennifer Lowe from UBS. Jennifer, your line is open.
Great, may be just a couple of quick ones from me. First, looking at the growth in online services, I know, you mentioned that they're anniversarying the TSheets acquisition, but even with that that was a pretty impressive growth number. And it certainly looks like you're going to exit that inorganic benefit to about higher growth rate than you were before that. Can you just talk a little bit about what are the levers that are really working within that segment? Is it payroll? Is it payment? Is that everything? Just any color there would be very helpful?
Hi, Jennifer. Thank you for your question. We're also very pleased with our online services growth. In fact, as you look back to where we are today versus about 18 months ago, the first quarter of fiscal year '18 we more than doubled the growth rate. And really it's very focused on what's most important to our customers which is helping them grow, helping them to get paid, helping them to get access to capital, helping them pay their employees.
We really thing about our customer problems and how we saw them in context of whether it's a accounting services, whether it's payment services, whether it's payroll services, capital, time tracking and now experts services that we’re going to be launching with QuickBooks Live. And so the direct answer to your question is, it's really all the services that we’ve been investing in and focusing on, because they matter a lot to our customers that’s contributing to the online services growth that you’re seeing, it's any one thing it's all of them.
And then just a quick one, I know last year there was a lot of discussion around the first year learning on the renewal rate of the self-employed users that came in through TurboTax attached. Now that we've got another year of history on that obviously the aggregated numbers looks very good, but I’m curious as you start to explore that, that cohort just any additional insights on how their retention trended this year? And how you think about that going forward? That’s it for me.
Sure, very good question. Let me make few different statements. One is, the reason we’re excited about this whole notion of being an AI driver expert platform in context of the customer problems that I articulated. It's also holding the interaction between customers on our platform. 40% of those that are small businesses hire are actually self-employed. And so what we’re solving for is to ensure that we can get as many customers on our platform as possible, because we find, we've solved the particular pain point for them.
And then solving the interaction between those customers on our platforms seamlessly, so it becomes the place where they run their time, they run their business, they run their life. And so strategically I want to make sure you need why the self-employed segment is so important and it's not we don’t just view it as a segment on its own. With that said in terms of the regal rates, now that we’re a couple of years in it's in line with what we’ve assume then of course at Investor Day we’ll share more of it, but it's very much in line with what we had assumed.
Your next question comes from the line of Josh Beck from KeyBanc. Josh, your line is open.
Thanks for taking the question. Obviously, it's a really good success with TurboTax Live more than tripling. I’m wondering, if you look underneath the growth a little bit. Could you talk about the retention in those live filers from the prior season and let say renewed that product skew?
Hi, Josh thank you for your question. What I would share is one, as you said we look at this is a $20 billion TAM opportunity where there is a huge confidence problem to solve, which is why we extended across all of our skews. And we see this is an opportunity to get quick income for our pros and help them with their life. And with that said, we love what we saw this year as you said three aspect roles on customers 70% of the new customers came from the assisted method the prior year. And our NPS and net promoters that are up into right, we of course at this point are not sharing the exact numbers. That maybe something that we share at Investor Day, but I think the takeaway you should have is on every dimension customers growth, retention, NPS for both the customers that we serve and the experts that are on the platform serving our customers, very proud of the improvements our team has made.
Okay. That’s very helpful. And then I also wanted to ask about the success that you have on the free side when you look maybe more midterm or long-term. Does that in some ways increase the opportunity for monetizing Turbo? Or is that maybe not the one of the opportunities you see down the road?
Yes, the way to think about it is really around what's most important to our customers, which is really about helping our customers make ends meet, and helping them get the largest tax refund and just finding ways to help them reduce their debt and increase their savings. And so when we think about three, one is focused on a segment of the marketplace, where we believe they deserve to do their taxes for free, and therefore why we significantly improve the experience this year, to ensure that we deliver against the standards we expect of ourselves and they expect of us.
It then gives us the opportunity through Turbo with the customers consent to help connect them to benefits that matter most because we are an agnostic platform. Well, we care most about is ensuring that they have an opportunity to get savings accounts at the highest rate that if they're going to get a personal loan, get that the best rate possible versus pushing our products. And that for us gets our heartbeats going faster because it's squarely focused on the customer and what matters most
The opportunity is actually significant, just in the United States, consumers overpaid in fees well over 60 billion plus. And we have an opportunity to match them with products, financial products that are right for them at the lowest rates. And so we use that as an opportunity to deliver for our customers and eventually a business opportunity.
Your next question comes from the line is Sterling Auty from JP Morgan. Sterling, your line is now open.
Great. Thanks. This is Jackson Ader on for Sterling tonight. Thanks for taking our questions. The first one, Sasan, if you can just help us reconcile something, the 55 million users over the last five years that you spent have paid nothing. How can we square that with the roughly 1.1, 1.2 million pre filing alliance users that you report on the fact sheet?
Yes, Jackson, thanks for your question. As I mentioned earlier, we did for the last 20 years supported customers that have certain income level and to be able to file for free. We do that directly with customers. And we also do that from the IRS Free File Program and that's something that the IRS has done a wonderful job setting up with the entire industry. And so, the 55 million includes both the free offerings directly to customers and the free file offerings that's all in one when you look at the 55 million over the last five years.
Understood. Okay, thank you. Then follow-up question, how many filers in the U.S. do you believe qualify for free filing on an annual basis?
You know, our SMS is probably about over 100 million-ish or so. This is the figure that we've talked about for years that ultimately are eligible for free and our other estimate is probably 20 to 25 million of them actually use free because customers have choice and they decide if they want added benefits that goes beyond free. But those are you know the SMS that we have.
Your next question comes from the line is Ken Wang from Guggenheim Securities. Ken you are now live.
Thanks for taking my question guys. Michelle, you guys mentioned that you had 30% increase in your TurboTax Live agent engagement, but also saw kind of essentially no increase in the number of agents actually process those plans. How should we think about the capacity going forward? Is that something that you think you can still extract some incremental efficiencies or looking next year that’s an area where you guys have probably step up a little more?
Hi, Ken, thanks for question. As we think about TurboTax Live we continue to be very excited about the opportunity there. When we look at just $20 billion opportunity is just in market and really helping customers have the confidence to file your tax returns and we do think this is a great opportunity. As we mentioned we did the improvement this year with three – customers and yes we had the same number of pro-2000 and so obviously we did have a couple of the operational efficiencies that we deliver this year.
Going forward we continue to look for ways to improve that experience. we want to make sure that we have helping firms get setup as easy as possible, so making that clear as possible and continuing those there are tools that use having those more efficient really looking for ways to automate work before the pros and use augmented intelligence and the best way possible to help them with their interactions with the consumers.
Got it and then Sasan one of the goals or I guess a couple of goals at the beginning of the year were to improve conversion at the top of funnel and then obviously increased retention as well. Sounds like retention improved expectations, any comments on how you guys did in terms of conversion at the top of funnel?
We’ll look at sharing some of this at Investor Day, but I would tell you overall we’re pleased on every mark that matters.
Your next question comes from the line of Brent Thill from Jefferies. Brent, your line is now open.
Just on QuickBooks, I think Michelle you said that strategic direction of how you're looking at the metrics is changing. I mean, many of those the growth rate is materially decelerating, but we’ve also had some price increases from fall to now I think you’ve raised prices on the essential plus list prices. Can you just talk through this dynamic of the decel, but also looking at price ranges and how are you thinking about that as a whole?
Hi, Brent. Yes, thank you for the question on QBO. QBOs, this quarter were at 32% which is slightly down, but we still feel that that is a very strong number. We have continued to say that we expect the QBO subs growth to moderate. And when you really look at what is joining the health of Small Business, it is truly on my ecosystem revenue and that is continuing to be a strong, a strong growth rate of 38% this quarter.
Just to pick up on your price comments, we always look at our price increases, we always have price increases that on any specific basis. We really look to continue to deliver the value for customers and we measure those very carefully. We never want to take a price increase that is going to dramatically impact our customer. And so, we look at those as we deliver more benefits to customer and we continue to watch on the retention side.
Your next question comes from the line of Raimo Lenschow from Barclays. Raimo, your line is now open.
Hey. Thanks for squeezing me in. Sasan, can I ask about Turbo please. You've mentioned the 14 million users there and the 70 offering. Can you talk and what they do? Can you talk a little bit about what you're seeing there? Obviously, there are other guys that kind of have that same business model. And is it more like -- is it more on the mortgage side, more on the credit cards side like what are you seeing in terms of early trends there?
Raimo, thanks for your question. So, our singular focus is to help our customers make ends meet when it comes to our vision with that Turbo. And with the customer's consent, what we trying to do, is to learn what's most important to them and based on understanding their behaviors, we will connect them to financial products that are right for them. And remember, we're in a very early innings of really understanding and learning what most important to them.
What's a very differentiated for us is, the customer is engaging with us at a very important moment which is the tax refund moment. And it's an opportunity for us to learn from them, what you want to do with your money. Do you want to actually save more money or will make offers such as pay you look like you have for credit cards, would you like a consolidated to one personal loan that could save you x amount of dollars and here is by the way what you kind of afford.
So, we're really focused on helping them make ends meet, reduce their debt, and ultimately save more money. And our advantage is the fact that we know the customer, we understand their behavior than we're on an agnostic platform to connect them to those products that matter most. And so, we're very early, but we love what we're seeing and what we're learning and just informing our game plan as we look ahead.
Perfect, and if I might squeeze in one follow-up. This tax season, I mean, with this could remind us, is this -- was this first one you've on fully AWS and what was the pros and cons from that one? Or just did you have some duplication? So, thank you.
Sure. It's out second year on AWS and we had a, what I would call and our teams would call an epic finish with a number of current users at the end of the season, the performance, the availability was the best we have ever seen. And one element of that is our team did incredible job, making sure the experience was an awesome experience, but too we credits being on AWS that's the fact that we handle those kinds of volumes. But it was our second year and it was a great outcome.
Your next question comes from Chris Merwin from Goldman Sachs. Chris, you are now live.
Okay. Thanks a lot. Just a couple from this if I could. I guess the first was on the TurboTax Live marketing campaign. I was wondering if you could just comment on how that performed relative to your expectation? I know the growth you saw year-on-year was very strong, so just any detail you could you could share? And I guess also how you're thinking about continuing to invest and marketing behind TurboTax Live to continue to disrupt that assisted tax category? And then I had a quick follow-up.
Hi, Chris, thanks for the question. In terms of raising awareness, we take a very strategic approach to our campaigns and really the focus right now has been to raise awareness, to help consumers understand that there is a different way that there could be another way given their tax situation. And given the campaign this year, it actually worked very well, we look at mix modelling, a marketing modelling and trying to understand how what the returns were for the dollars that we spend and the effectiveness of the campaign.
And we would really like the metrics that we have seen and we’ll be doing more deep dives to understand what that will inform for the next year. But the way you should be thinking about is just as that the beginning of a multiyear and decade campaign to rate awareness delivering often experiences a more customers held one another and then shifting the elements of the campaign from a just simple awareness to effectiveness. But thus far we’ve enjoyed what we’ve seen.
Okay, great. And then follow-up was just on the revenue per return, I think it was up low double-digits in the 2Q, but up more likely low singles in the 3Q. I know you talk about the decision obviously to optimise the user experience which is resulted in more free filers in Q3. But what do you -- for those changes live in Q2 as well and I'm just curious why there is I guess such a big delta between the growth and revenue per return between 2Q and 3Q?
Sure, sure. Is your question around TurboTax Live versus TurboTax?
Or just the overall kind of changes you made to promote more free filing across the total platform.
Got it, got it. Thank you for the question. So, two things that I would say, one is based on the decisions that we’ve made to accelerate free and the decisions that we’ve made to have TurboTax Live across the line up. In essence, our ARPC would have been several points higher, if we chose not to make that decision.
But we don’t solve for ARPC, what we’re solving for is accelerated customer growth and making sure that we grow the revenue double-digit and ensuring that operating income grows faster than revenue. So, I would just focus on those principles, but I would just end with again saying ARPC would have been several points higher, if we have not made those decisions on free.
Your next question comes from the line of Kartik Mehta from Northcoast Research. Kartik, your line is open.
Hi, good evening, Sasan. Just a couple of questions on TurboTax Live, as you watch the progression of that product and it has a price point. What are your thoughts on price elasticity for the product? You think there is an opportunity that it's providing value that you can raise prices for? Do you think this is a product where you might have to lower the prices and you’ll get a lot more quantity of users?
Hi, Kartik, thanks for your question. This is a $20 billion TAM 90 million customers, our number one focus is acing the experience for our customers help them to build confidence, acing the experience for our pros as they do a spectacular job delivering for our customers. And there is so much more room for growth here. The least of our focus is pricing although we think about that. It's about solving the problem well because we believe that there is so much headroom for growth. We do believe there is certainly headroom for price increases, but we’re just so early and it's such a huge TAM that we just believe the opportunity is to nail the experience and get as many customers to use the platform as possible. So it goes viral and they tell others.
And Mitchell just one more question on margins as it related to TurboTax Live. I know you’ve talked a lot about automating the process, AI. I’m wondering, how close you think TurboTax Live margins can get to traditional TurboTax since there is human intervention obviously in the TurboTax Live? I’m just wondering how close you can get by using AI and automation?
Thanks, Kartik. I appreciate the question on TurboTax Live. One of the things that has really helped us when we think about TurboTax Live; number one, I mean, last year was the first year this year, as we said, a number of times means driven and a ton of efficiencies with three extra customers, and yet the same number of pros. But we really continue to look at how do we use automation? And how do we use augmented intelligence to drive it.
Another thing I would say is, we have focused a lot on using technology here and really focusing on technology first, then bringing the experts to help, which has enabled us to be in potentially a different margin range than most people may with this type of an offering. So we're very pleased with the margins we're seeing. And as Sasan just mentioned, if there's so much opportunity here right now, we are really focused on how do we continue to bring customers in and continue to just deliver that great experience.
Your next question comes from the line is Michael Turrin from Deutsche Bank. Michael, your line is now open?
Just one for me. Following up on the QBO subs question earlier, appreciate you been signaling that growth rate is expected to moderate, but looks like it's happening a bit more on the U.S. side. Is there anything you can add in terms of expectations products split between U.S. and international could stack up in terms of a more normalized growth profile going forward? And then on the international side, any specific geos to call out there in terms of contribution? Thanks.
Hi, Michael, thanks for the question. First of all the reasons we talked about watching online ecosystem revenue growth of 30% plus is, it gets to a place where how do you count to stub because we have SE subs, we have QBO subs. We're now looking at TSheets subs, we have payment subs. So there is one element of that is, how do you count the subs? And so, we want to make sure that we actually provide you all a very clear flagpole of what to watch for.
The second is we're actually very pleased with our progress in the U.S. because while we've been focused on self-employed which has seen very good growth, we're really focused on accelerating our focus into mid market. And so when you look at the growth rate in the U.S. are 25%, given the mix of customers that were actually focused on going after, and specifically the services that were focused on going after, we're very pleased with that.
And I think, ultimately, the bang marks to your question is, I would focus on online ecosystem revenue growth because that is the best indication for the health of the franchise. And the second part of your question, I apologize, I did not answer yet which is the geographies. We are very pleased with our progress in UK, Canada and Australia. And we are making very good progress in getting the product market fit in France and in Brazil.
Your next question comes from the line of Walter Pritchard from Citi. Water, you are now live.
Hi, thanks. Just the most questions have been answered here, but two quick ones. One on I think there's a fear at the beginning of a season possibly the season trade down from customers who had simplified filings and go into these standardized deduction moving to free. You did have a strong performance on free. Could you help us understand in the context of what you ended up seeing in tax season? How the trade down effect either impact -- didn’t impact the number?
Hi, Walter. The trade down effect did not affect our expectation. It was within our expectation. It was the deliberate decision that we made was with again in context of our durable strategy of delivering the best free offering ever, which was around including year-over-year data transfer for free and extending free for the entire season that really impacted our ARPC. And again was all very deliberate, we’re pleased with what we saw. But really trade down was not a driver well that’s for expectation. It was within our expectations.
And then on advance, I'm curious how much -- I know it's really, what percentage of those customers are you seeing to sort of a direct conversion off of QuickBooks to QuickBooks Online and QuickBooks Desktop? And how much of it sorted out plan displacement with other kind of midmarket financial accounting packages and other sources?
Yes, thank you for the question. First of all I’ll start with around 70-30, 70% existing 30% new, only because we really haven’t yet aggressively pursued new because we’ve actually been focused on building out the platform. The reason the mix is so much existing is. We have about 180,000 or so QBO customers that are actually kind of in that mid market range. They’re looking to be able to do a batch invoicing. They’re looking to be able to have roles and permissions.
And we’ve been aggressively building out -- building out the platform so we can ultimately migrate those customers to platform that they are happier with. And then we will shift more aggressively to go after new customers. Desktop is not really playing a role just yet because those desktop customers are really looking for inventory capability, which we will build out as we overtime begin to more aggressively focus on product based businesses.
Your next question comes from the line of Yao Chu from RBC. Yao, your line is now open.
Hi everyone thanks for taking my question and squeezing me at the end here. Two quick ones, we've picked up a late-season to TurboTax Live pro SKU. Just any comment on that what’s the meaningful impact, and how to think about that attentions of character build out? And the other one I guess is a lot of discussion around TurboTax Live, but we view this very much as a multi-year phenomenon. Is there a way to think about an upper bound of the attached on a three year basis, a five year basis of a nature investment needed to get there in broad terms should be helpful? Thank you.
Hi, thank you for your question. I’ll start with your first one, which is we’re always experimenting, as I mentioned earlier, with the $20 billion market opportunity and 90 million customers most of which use the associated category because of a lack of confidence, really our initial focus was helping those that may just want to use TurboTax but are looking for help on on-demand.
We’re also testing an essence full service, which is we’ll do it for you that’s what they want us to do. And that’s the test it sounds like you fell into, and we're early in our inside the learnings to see what the future brings based on what’s most important to our customers. In terms of TurboTax Live, we don’t think about it in terms of the attach, we think about it in terms of what’s most important to our customers because there are some customers that come in and write off the bat. They want to ensure that they have helped along the way.
Overtime, it could be those that also come in and are looking for this full service offering. So we don’t think about it in context of attach. We think about it in context of the segments of customers that are up higher doubts, fear and uncertainty and are looking for an essence expertise and help. In terms of how to think about how to model it, you know, Mitchell, I think did a nice job earlier around the way you all and the way we would want you all to be thinking about this opportunity for us.
We are putting our best and brightest engineers on solving this problem to an AI-driven expert platform. It's all about applying technology to solve this problem very, very well, not only for the customer, but for the experts. So, we should not think about this opportunity as a typical human capital business. We should think about this as completely digitizing services and experts having AI-driven power tools at your fingertips to be able to serve customers very, very easily.
And in fact the more we learn by solving the two sided problems. We actually make the platform better, so that the customers get the answers to their questions and much, much more rapidly. So I think the way to think about this is just a huge opportunity for us to drive revenue growth and think about our margins and way to model it at the Company level, which is the guidance that we provided.
Ladies and gentlemen, I am not showing any further questions. Would you like close with any additional remarks?
Yes. Thank you and I apologize for interrupting you. First, I want to thank everyone for the great discussion and the great questions.
I just want to leave you with the notion of we are very excited about of strategy of an AI-driven expert platform. We have incredible confidence in our segments, incredible confidence in the progress of the Company.
We look forward to sharing more in the upcoming quarters and at Investor Day, and we hope everybody has a wonderful rest of the day and we thank you.
Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.