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Intuit Inc. (INTU)
September 21, 2011 4:00 pm ET
R. Neil Williams - Chief Financial Officer and Senior Vice President
Tayloe Stansbury - Chief Information Officer
Brad D. Smith - Chief Executive Officer, President and Director
Matthew Rhodes -
Kiran M. Patel - Executive Vice President and General Manager of Small Business Group
Eric C. W. Dunn - Senior Vice President of Payments Initiatives
CeCe Morken - Vice President and General Manager of Intuit Financial Services
Jill A. Ward - Former Vice President of Vertical Business Management Solutions
Unknown Executive -
Daniel R. Maurer - Senior Vice President and General Manager of Consumer Tax Group
Peter L. Goldmacher - Cowen and Company, LLC, Research Division
Brent Thill - UBS Investment Bank, Research Division
Adam H. Holt - Morgan Stanley, Research Division
Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division
Kash G. Rangan - BofA Merrill Lynch, Research Division
Brad A. Zelnick - Macquarie Research
James Macdonald - First Analysis Securities Corporation, Research Division
Unknown Analyst -
Gil B. Luria - Wedbush Securities Inc., Research Division
Ross MacMillan - Jefferies & Company, Inc., Research Division
Ladies and gentlemen, please welcome Director of Investor Relations, Matt Rhodes.
Previous Statements by INTU
» Intuit's CEO Discusses Q4 2011 Results - Earnings Call Transcript
» Intuit's CEO Discusses Q3 2011 Results - Earnings Call Transcript
» Intuit's CEO Discusses Q2 2011 Results - Earnings Call Transcript
I do have to read this quickly, my apologies, and I will do it quickly. I have it memorized for the record, but I'm going to read it off the screen.
Forward-looking statements. These presentation materials include forward-looking statements. There are a number of factors that could cause our results to differ materially from our expectations. Please see the section entitled Cautions About Forward-Looking Statements in the enclosed Appendix for information regarding forward-looking statements and related risks and uncertainties. You can also learn more about these risks in our Form 10-K for fiscal 2011 and our other SEC filings, which are available on the Investor Relations page of Intuit's website at www.intuit.com. We assume no obligation to update any forward-looking statement.
In non-GAAP financial measures. These presentations include certain non-GAAP financial measures. Please see the section entitled About Non-GAAP Financial Measures in the enclosed Appendix for an explanation of management’s use of these measures, and a reconciliation to the most directly comparable GAAP financial measures.
So today's agenda. Here's what we're going to present today. We're going to kick it off with our CEO, Brad Smith, who will run through our strategy, take a look back at the past year, as well as our focus for FY '12 and beyond. Kiran's going to talk about all things small business. We have Jill Ward in addition this year from last year, who's going to talk about the Accounting Professionals business after Kiran presents. CeCe Morken, our newish leader of Financial Services will be up here as well. After that we'll take a quick break, and then we'll get back here for Dan Maurer, who's going to talk about tax; Tayloe Stansbury, also an addition this year, is going to talk about our technology, what we're investing in from an R&D and infrastructure standpoint, he's our CTO. And then Neil will wrap it up with the financial perspective, and we'll have time for about 30 minutes of Q&A that Brad will come up and lead at the very end.
So like I said, the presentations we plan to run until about 4:45 or so and then after that, we'll take you over to take a look at some of our exciting new and upcoming products over in Building 11. So thanks again for joining us. Enjoy the day.
Our CEO, Brad Smith.
Brad D. Smith
All right. Thank you, Matt. All right. Hello, everyone. And I want to add my welcome to Intuit's 2011 investor day. As you just saw from the agenda, we've got an action-packed agenda. And I hope you're going to find what we have to share with you useful this afternoon, and going into the evening.
Now to kick off the afternoon, I want to preview the 3 topics that I wanted to share over the next 40 minutes. First, I'd like to reflect back on our performance in fiscal year '11. I'll talk about the areas that we've performed well. I'll also highlight the areas that we're constructively dissatisfied with our execution. We believe we can do better. Then I'll shift our focus to the external market. And in the external market, I'm going to talk about the near-term economic scenario and how that has implications for our business and our opportunities, but I'm also going to talk about the longer-term secular shifts in the market that we believe serve as catalysts for our company's growth rate. And then I'll recap by reviewing our company strategy to win, and talk about the opportunity we see ahead of us over the next several years if we stay focused and we execute well.
So with that, let me start with the year in review. And I'll start with our financial performance, which I realize is old news now. But sometimes when it's good news, you like repeating it. So I am pleased with the performance our team has delivered in the fiscal year '11. Despite the tough macroeconomic environment, we delivered 11% top line revenue growth, we expanded our operating margins 80 basis points and we improved our non-GAAP diluted earnings per share of 19% year-over-year. Now when you stack those results up against the financial principles that we use to run the company, we had a pretty good year. Just to recap those financial principles, our goal is to grow our revenue organically double-digits each and every year, to grow our revenue faster than our expense, which creates good operating leverage and also produces strong cash flow and then we use that cash to make investments in things that we look to produce a 15% return over a 5-year period.
Now our first preference and priority is to invest in the company. In R&D and infrastructure, sales and marketing, we also looked for strategic acquisitions, typically talent and technology tuck-ins and then we also return cash to shareholders. We've historically done this in the form of a stock repurchase. Since 2001, we have returned $7 billion to shareholders through our stock repurchase plan. We've purchased 250 million shares at an average price of $28. Compared to today's price, that's a pretty good return.
This past year in the fourth quarter, we added a dividend as well. It's an and, not an or. And so at the end of the day when you look at our financial performance, we feel pretty good about the year. But when you clip down underneath the covers and you look at the operational drivers that produce these results, we had some hits and we had some misses. I want to spend a few minutes just recapping both. And I'll start first with what feels good.
What really feels good right now is that our strategy is durable, it's the same strategy I shared with you last year, it's the same strategy we talked about 2 years ago. It's also working. It's expanding our customer bases. It's improving the quality of our offerings, which you know we measure with Net Promoter, the willingness to recommend it to a friend or family member and it's increasing our market share. So what's happening is in aggregate, it's transforming our company from a historical shrinkwrap software company to a company that's increasingly a Connected Services provider. In fact, we exited fiscal year '11 in July 31 with 62% of our revenue now coming from Connected Services. That's up from 59% 12 months ago. We now have 35 million customers using our hosted products, our SaaS products, Software-as-a-Service, now represent $1.5 billion in revenue and that revenue's been growing at 37% compounded annually over the last 5 years. So that feels good; a company that's delivering with the next generation of technology to customer who need our products and services.
I also feel good that we've been making the investments to lean into the next chapter, in a 24x7 world and in a mobile-first with the computer and the palms of our customers' hands. This time last year, you may remember we had some pretty concerning outages in some of our data centers. It had impact a couple hundred thousand customers; we were embarrassed. We made it the #1 priority that we would close the gap in the 12 months that ensued from last summer to now, and we have. We shut down 12 inefficient data centers. We've invested in 2 world-class data centers; one in Quincy, Washington, one in Las Vegas. We have refreshed our technology and we are now performing much better, and we're holding ourselves to a higher bar. Over the next couple of years, we're going to continue to invest in this area. And the second area is in mobile. Mobile's been a part of our strategy since 2008. These are now computers in the palms of our hands. Smartphones have 1000x the processing power of what it took to land a man on the moon with the Apollo 11 spacecraft. If you are developing software and services, you need to be designing for a mobile-first world.
I will tell you all of our businesses have mobile offerings. We now have millions of customers, tens of millions of dollars in revenue and our applications and services served on mobile devices are ranked in the top of the App Stores in each of their categories. What's neat is, these mobile devices are enabling us to solve problems in ways we could've never done on a PC. In fact, what I'd like to do is show you a quick video clip of how our products and services are embedded into the daily lives of consumers and small businesses now and they're transforming their lives in very unique ways. So let me roll the video.
It's pretty cool stuff. We're very excited. In fact I hope tonight, you will get the chance to go to the Innovation Gallery Walk, because you'll see over 20 different offerings on mobile devices. They are doing the kind of things that you just saw on that little video there, and they are absolutely the most popular products we have in our portfolio right now. So that's exciting progress.
In a world where these social platforms and mobile App Stores matter, companies have to be able to work with the industry leaders. And I'm very proud to say we're sitting shoulder-to-shoulder at the table with some of the industry's top leaders, looking for ways to put our assets together to serve many, many more customers. I'm proud of the announcements we've made with Google, trying to get websites in the hands of all small businesses or the fact that we've signed a partnership with Salesforce.com and we have many more like this.
I'll also tell you that inside the company, we continue to invest in creating a work environment and invest in our talent to keep Intuit fast moving and entrepreneurial. You've heard some of the principles we talk about. We don't want our teams to be any bigger than 2 pizzas can feed. We want to go from an idea to a prototype in market in 6 weeks or less. And we try to celebrate the lessons of failure just as often as we celebrate success, because that's how we get better each and every day. Because we do that, our engagement scores this year for our employees, their willingness to recommend Intuit to a friend or family member went up 3 points. We're now at best-in-class levels, and this is important because the talent market in the Silicon Valley is heating up. Getting the world's best talent and keeping the talent is a top priority for us. And because we have our employees engaged and they're in an innovative environment, staying focused on customers, that's producing the kind of financial results that you saw and hopefully the kinds of returns you would hope to get from a company like Intuit in terms of the share performance.
The last thing I'll say in terms of what feels good is our recognition starting to pick up some momentum in the market. This past year, Intuit moved up 50 spots in Fortune magazine's Top 100 Best Places to Work. We were ranked in Forbes' Top 100 Most Innovative Companies in the World, and Harvard Business Review wrote an article in June talking about our approach to innovation and the fact that it's 8,000 employees job. It's not a team set aside in the lab, it's all 8,000 employees. I was pretty proud coming from a state school; I call this our goodwill hunting moment. So we have some things in fiscal year '11 we feel pretty good about. But this is Intuit, and we realize that we aren't the best that we can be. We had some areas, quite frankly, that we left opportunity on the table. I want to cover 4 with you very quickly.
First, our first-use experiences for many of our products is not as easy as it needs to be. In fact, we did a study across all of our product lines; for every 100 customers we get to come in and try a product the first time, we're converting between 2 and 14 to come back a second time. Now we are the company known for ease-of-use. So this may be better than the alternatives in the market, but it's not good enough. We know we can do better. In fact, you'll see our teams have been hacking away at this throughout the year. We took our merchant approval form process down from 8 screens down to 3. And we feel we're making good progress until we started to watch customers in a mobile world. For every piece of information you ask somebody to key in to a mobile phone, you cut your conversion by 50%. You want a username, 50% dropped out. You want a password, there's another 50%. So we need to clean sheet our thinking here. We focused for 2 days 3 weeks ago with our top 400 leaders. We are most ourselves in the best practices outside and inside, and this is our #1 focus you'll hear about across all the businesses this afternoon. We know we can do better. I'll size how big this is for us towards the end of my discussion in a few minutes.
The second area we have to do more and faster at is social and using data to create customer delight. Let me explain that what we've done in this last year is exciting. You may have seen we were ranked as the second most social company by an outside survey. But what's happening right now is what we do in social marketing. We had 25 billion impressions that we made in the market last year through TV advertising, websites and social. 21 billion of those were through social marketing. Well just think back when the Internet first came out. The first thing that happened when someone ran into a conference room and said, "Hey, the Internet's here. We've got to be on the Internet." And the marketing team raised their hand and said, "I've got it, boss." And they put our brochures online, they put our hours of operation, they put our toll-free numbers and we were on the Internet. And then about 6 months later, someone said, "Well, if you can market on the Internet, you've got to be able to sell your products." So we put shopping carts up there, we accepted credit cards. You could order QuickBooks Desktop or TurboTax desktop, we put it in a package and we FedEx it to you. Now you fast-forward 10 years, the Internet is a business; 3 out of 4 tax returns are filed through TurboTax online now. We have QuickBooks Online going 42%; faster than the other products in the small business suite. The same thing is going to happen with social. We see right now we're taking our content, and we're getting people to tweet about it in Twitter and we're putting it in Facebook, and that's getting 21 billion impressions of social marketing. The next chapter is design social into the product: Like It buttons; Share buttons; like communities where they can answer each other's questions. We will know we're there when it's no longer our content surrounded by people talking about it; it is people creating the content.
Third-party software developers building on open platforms to solve problems we can't get our engineers enough time to focus on ourselves, and customers contributing value as well. And that's the root of all that is data. Data that does the work for the customers; it pre-fills the forms; you don't have to ask for information, and it gives them insights. This is such a big opportunity for us. We have named a leader who was running our payroll business for the last 3 years, Nora Denzel, is now leading social and data for the like inside the company, and we are focused on making progress in the next 12 months.
The third area that we need to step up our game is mergers and acquisitions. As you know, we have a proud history as a company of making acquisitions that are typically smaller talent and technology tuck-ins but quite frankly, we've had some spotty execution. This past year, we had to take an impairment charge on our Medfusion acquisition. Now the reality is this, Medfusion grew 50% in revenue year-over-year; it was the fastest growing business unit in the entire company. But our math and our expectations and what we actually have put together when we justified the acquisition for ourselves was higher than that. We need to do a better job of getting reality around what these acquisitions are going to deliver in the first year, and how we do our integration better. So we're going to go back to the drawing board to make sure we have a better game plan and a blueprint for when we do acquisitions.
And the last area that we need to step up our game is continuing to make the investments in infrastructure and refreshing our technologies. Our agents need to have tools now that can see a 360-view of the customer. And that customer is now in the cloud, and we have to give them the ability to monitor how the product is performing in the cloud. Is there any latency? Is there any downtime? The other thing we're doing is we're refreshing our technology. We're getting the data out of the C drives of those QuickBooks desktop customers up into the cloud, so they can access it through mobile devices and we can take it to new geographies around the globe. We're making these investments. You'll hear Neil talk more about it. It's in our game plan, but it's an opportunity for us to do better.