Intuit Inc. (NASDAQ:INTU) Q1 2023 Earnings Call Transcript

Intuit Inc. (NASDAQ:INTU) Q1 2023 Earnings Call Transcript November 29, 2022

Intuit Inc. beats earnings expectations. Reported EPS is $1.66, expectations were $1.22.

Operator: Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to Intuit’s First Quarter Fiscal Year 2023 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. With that, I’ll turn the call over to Kim Watkins, Intuit’s Vice President of Investor Relations. Ms. Watkins?

Kim Watkins: Thanks, Regina. Good afternoon and welcome to Intuit’s first quarter fiscal 2023 conference call. I’m here with Intuit’s CEO, Sasan Goodarzi; and Michelle Clatterbuck, 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 2022 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’ve 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’ll turn the call over to Sasan.

Sasan Goodarzi: Great. Thank you, Kim, and thanks to all of you for joining us today. We had a strong first quarter as we executed on our strategy to be the global AI-driven expert platform powering prosperity for consumers and small businesses. We continue to feel bullish about our momentum and execution across small business and tax. We’re innovating at a high velocity using the power of our platform and modern technology capabilities to deliver new offerings at scale focusing on breakthrough adoption. We continue to be focused on putting more money in our customers’ pockets, saving them time and ensuring complete confidence in every financial decision they make. This is more important than ever in the current uncertain economic environment and helps us penetrate our large total addressable market of over $300 billion.

Now let’s turn to our first quarter results. Revenue grew 29%, including 13 points from the addition of Mailchimp. Total revenue growth was fueled by the Small Business & Self-Employed Group revenue growth of 38% or 19% excluding Mailchimp and 25% revenue growth in the Consumer Group driven by a strong October peak with new customers and extension filers. The scale of our platform, along with our rich data, gives us the unique ability to see charge volume growth, the number of employees paid, the hours worked per small business and cash reserves. These measures remain strong for those on our platform and inform our perspective on the health of small businesses. TurboTax had a robust finish to the tax season with a record number of innovations launched and tested in the October peak.

I’m excited about this upcoming season, particularly our strategy to transform the assisted category, including the launch of Business Tax and TurboTax and Credit Karma platform integrations. Now turning to Credit Karma. At Investor Day and on our fourth quarter call earnings call, we shared that all Credit Karma verticals had been negatively impacted by the macro uncertainty. In the last few weeks of the quarter and into November, we saw further deterioration in all verticals. Consumer default rates remain relatively low by historical standards, reflecting strong consumer cash balances coming out of the pandemic. However, we continue to see partners pull back from extending credit, reflecting the uncertainty in the economic environment and the risk of deterioration in credit performance.

Given this context, Credit Karma revenue came in lower than expected for the quarter. We are lowering our fiscal year 2023 revenue guidance for Credit Karma to a decline of 15% to 10% versus our previous guidance of 10% to 15% growth. At the same time, we are reiterating our fiscal year 2023 revenue guidance for all other segments and reiterating our fiscal 2023 GAAP and non-GAAP operating income and earnings per share guidance. Our ability to maintain earnings power despite the lower Credit Karma revenue guidance shows the power of our diversified platform and our ability to balance platform and product investments for the future while delivering on our commitments. Regardless of the near-term macro volatility, we remain confident in our long-term revenue growth expectations of 20% to 25% for Credit Karma driven by our vision and innovation to become the self-driving financial platform fueling prosperity for all consumers.

At Investor Day, we shared how our AI-driven expert platform strategy is accelerating our innovation and how our 5 Big Bets are solving the largest problems our customers face. We continue to deliver strong proof points that demonstrate our success and are well positioned for durable growth in the future. As a reminder, our 5 Big Bets are: revolutionize speed to benefit, connect people to experts, unlock smart money decisions, be the center of small business growth and disrupt the small business mid-market. Today, I’d like to highlight examples of our recent progress across three of these Big Bets. Our first Big Bet is to revolutionize speed to benefit. Our platform enables us to innovate for our customers with speed and at scale, which is foundational to all of our Big Bets.

Our evolution from a siloed technology stack to a platform leveraging shared capabilities is well underway. Our development environment enables speed and innovation. Engineers now have 6x the velocity of deploying code, resulting in accelerated innovation compared to fiscal year 2020. Our AI and fintech capabilities are well positioned to solve our customers’ biggest problems, such as our money innovations across payments and payroll, advancements in TurboTax Live, QuickBooks Live and QuickBooks Advance, just to name a few. And we’re doing that today with over 730 million AI-driven customer interactions per year, 2 million AI models in production, 58 billion machine learning predictions per day and over $465 billion in money moved during fiscal year 2022.

Our second Big Bet is to connect people to experts. We’re solving one of the largest problems our customer face, lack of confidence, by connecting people to experts virtually. During the October tax peak, our team launched a record 50 innovations to test and learn. Our learnings can help us transform our go-to-market campaign for the assisted segment; revamp the end-to-end TurboTax Live platform experiences with faster access to money via Credit Karma; and better serve the investor, Latino and self-employed segments. We are looking forward to the upcoming tax season. Our fourth Big Bet is to become the center of small business growth by helping our customers get customers, get paid fast, manage capital, pay employees with confidence and grow in an omnichannel world.

With Mailchimp, we’re well on our way to becoming the source of truth for our customers to help them grow and run their business. We have three acceleration priorities with Mailchimp: first, delivering our vision of an end-to-end customer growth platform; second, disrupting the mid-market by developing a full marketing automation, CRM and e-commerce suite; and third, accelerating global growth with a holistic go-to-market approach. This quarter, we launched a new brand campaign, refreshed our website and launched an improved first-time use experience for new customers that help them more quickly find and use the feature that aligns with their unique business needs. We also launched a one-hour assisted onboarding process for our high-value Mailchimp customers with the goal of guiding them to more advanced features to increase awareness and usage.

This program was launched in a record four weeks by leveraging components of our virtual expert platform, another example of the power of the Intuit platform capabilities. As a result of these enhancements and others, we’re seeing a positive impact on customer growth and expansion and a lift in customers converting to pay. Turning to our money portfolio. We’ve made a tremendous investment over the last few years to expand our suite of money offerings to help small businesses get paid, pay others and access capital and manage their money. We continue to see strength in our charge volume driven by easier discovery, auto-enable payments, instant deposit and getting paid upfront. This quarter, we made it even easier for more customers to access their cash quickly by removing friction and opening the funnel to more customers.

We’re also rolling out a new invoicing experience with a more streamlined workflow and improved design, which is driving an increase in the percentage of companies that send payment-enabled invoices. Looking ahead, we’re tackling another big challenge for our small business customers, B2B payments. More than $2 trillion of invoices were managed in QuickBooks in fiscal year 2022. As we shared at Investor Day, we are launching the QuickBooks Business Network, which connects small business customers each other, making it easier for them to do business. It’s currently in beta testing, and we expect to launch more broadly later this fiscal year. We’re also building our own bill pay functionality in QuickBooks and plan to launch this capability in the future.

We’re excited about our opportunities for growth with Mailchimp and payments becoming the center of small business growth. Wrapping up, we feel confident in our long-term business strategy and the power of our platform. In an uncertain macro environment, the benefits of our global financial technology platform are more important and more mission-critical than ever for our customers. We have a large TAM with low penetration, secular shifts working in our favor, a diversified large-scale platform where we continue to invest heavily in innovation across our 5 Big Bets to deliver benefits for our customers, resulting in top line growth and margin expansion. We’re proud to be an employer of choice as well as the financial technology platform of choice for over 100 million customers around the world who rely on Intuit to prosper.

Now let me hand it over to Michelle.

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Michelle Clatterbuck: Thanks, Sasan. For the first quarter of fiscal 2023, we delivered revenue of $2.6 billion, GAAP operating income of $76 million versus $195 million last year, non-GAAP operating income of $662 million versus $555 million last year, GAAP diluted earnings per share of $0.14 versus $0.82 a year ago, and non-GAAP diluted earnings per share of $1.66 versus $1.53 last year. Turning to the business segments. In the Small Business & Self-Employed Group, revenue grew 38% during the quarter and 19% on an organic basis, excluding $264 million in Mailchimp revenue. Online Ecosystem revenue grew 60% in Q1 or 28% excluding Mailchimp. With the goal of being the source of truth for small businesses, our strategic focus within the Small Business & Self-Employed Group is threefold: grow the core, connect the ecosystem and expand globally.

First, we continue to focus on growing the core. QuickBooks Online accounting revenue grew 29% in Q1 driven mainly by customer growth, higher effective prices and mix shift. Second, we continue to focus on connecting the ecosystem. Online services revenue, which includes Mailchimp, Payroll, Payments, Capital and Time Tracking, grew 109% in Q1. Excluding Mailchimp, online services revenue grew 28%. Mailchimp revenue included in online services was $264 million, up low teens versus a year ago, in line with our expectations. Within Payroll, revenue growth in the quarter reflects an increase in payroll customers and a mix shift to higher-end offerings. Within Payments, revenue growth reflects an increase in charge volume per customer and ongoing customer growth.

Third, we continue to make progress expanding globally, and we began to execute our refreshed international strategy, which includes leading with Mailchimp. On a constant currency basis, total international Online Ecosystem revenue grew 172% in Q1 and 19% on an organic basis excluding Mailchimp. Desktop Ecosystem revenue grew 7% in the first quarter. As a reminder, the subscription model for our desktop accounting solution makes this revenue more predictable, and we raised our desktop prices for several products in September to more closely align with QBO pricing. QuickBooks Desktop Enterprise revenue grew mid-single digits during the quarter. We continue to expect the Online Ecosystem to be our growth catalyst going forward. Moving on to Credit Karma.

Revenue grew 2% to $425 million in Q1. This was below our expectations of mid-single-digit growth we shared at Investor Day due to further deterioration in all verticals the last few weeks of the quarter. On a product basis, revenue growth was driven primarily by credit cards, offset by headwinds in personal loans, home loans, auto insurance and auto loans. As the macro environment continues to remain uncertain, we’re seeing an impact across all verticals. Sasan touched on this briefly earlier, but let me unpack what we’re seeing. In credit cards, many financial institution partners have tightened eligibility, particularly in riskier segments. In personal loans, we saw continued pressure with many partners tightening eligibility further while increasing APRs. We continue to expect personal loan revenue to decline this year after very strong growth in fiscal 2022.

As a result, we are reducing our fiscal 2023 Credit Karma revenue guidance to a decline of 15% to 10%. This embeds the current trends we’re seeing and additional conservatism in the remainder of the year despite the expected continued rollout of several new innovations. Consumer Group revenue was $150 million, reflecting a strong finish to the tax season. We remain focused on transforming the assisted category in the tax prep market as we head into the next tax season. We’re focused on making TurboTax a compelling destination for filers who prefer assistance to complete their taxes accurately and quickly. Turning to the ProTax Group. Revenue of $34 million was in line with our expectations. Our financial principles guide our decisions remain our long-term commitment and are unchanged.

We finished the quarter with approximately $2.7 billion in cash and investments and $7 billion in debt on our balance sheet. We repurchased $519 million of stock during the first quarter. Depending on market conditions and other factors, our aim is to be in the market each quarter. The Board approved a quarterly dividend of $0.78 per share payable January 18, 2023. This represents a 15% increase versus last year. As I shared last quarter, we have an operating system we use to run the Company, and this includes a proven playbook for operating in both good and difficult economic times. Our first priority is to do the right thing for customers giving them access to the tools and offerings they need most. We manage for the short and long term and control discretionary spend to deliver strong results while investing in what is most important for future growth.

The scale of our platform, along with our rich data, gives us the unique ability to see leading indicators that allow us to be forward-looking and adjust quickly. As Sasan shared earlier, we are reiterating our operating income and earnings per share expectations for fiscal year 2023 despite our lower revenue expectations for Credit Karma. We’re able to do this by reducing spend in areas where we expect to see lower returns near term. Last quarter, I mentioned we identified several levers we can pull to deliver against our financial principles in a variety of scenarios, and the adjustments we have made are an example. Given the breadth of our offerings and the power of our diversified platform, we have the ability to maintain earnings power despite our expectation for lower Credit Karma revenue.

At the same time, we have the ability to make the necessary platform and product investments for the future while delivering on our short- and long-term commitments. We also have a strong balance sheet that enables us to play offense. We will continue to accelerate our innovation, and our goal remains for Intuit to emerge from this period of macro uncertainty in a position of strength. Moving on to guidance. For fiscal 2023, we are lowering our revenue guidance for Credit Karma as trends in all verticals further deteriorated in the last few weeks of the quarter and into November. We now expect revenue to decline 15% to 10% versus our previous guidance range of 10% to 15% revenue growth. We are reiterating our revenue expectations for all other segments and now expect total company revenue growth of 10% to 12% versus the previous range of 14% to 16%.

For the Small Business & Self-Employed Group, we continue to expect 19% to 20% revenue growth. And for the Consumer Group, we continue to expect 9% to 10% revenue growth. In both businesses, we expect the majority of our growth this year to come from customer growth and mix. We are reiterating our GAAP and non-GAAP operating income and earnings per share guidance for fiscal 2023. This demonstrates the resiliency of our diversified platform and business model. So to recap, for fiscal year 2023, we expect total company revenue growth of 10% to 12%, GAAP operating income growth of 9% to 13%, non-GAAP operating income growth of 17% to 19%, GAAP diluted earnings per share to decline approximately 5% to 1%, and non-GAAP diluted earnings per share growth of 15% to 17%.

Our guidance for the second quarter of fiscal 2023 includes revenue growth of 8% to 9%, GAAP loss per share of $0.29 to $0.23, and non-GAAP earnings per share of $1.41 to $1.45. You can also find our full fiscal 2023 and Q2 guidance details in our press release and on our fact sheet. And with that, I’ll turn it back over to Sasan.

Sasan Goodarzi: Great. Thank you, Michelle. As you all heard from Michelle and I, we’re seeing continued momentum as a result of our strategy of being a global AI-driven expert platform, growing Intuit double digits with margin expansion. With our accelerated organic innovation and the addition of Credit Karma and Mailchimp, we are the leading global financial technology platform that powers prosperity for people and communities. And with that, let me turn it over to your questions.

Operator: Our first question will come from the line of Siti Panigrahi with Mizuho. Please go ahead.

Siti Panigrahi: Sasan, you lowered your Credit Karma growth now from 10% to 15% growth to decline now 15% to 10%. Just want to dig a little bit into your assumption for the remaining quarters in this fiscal year. Where do you see — how conservative is this guidance? And I know that the Karma guarantee will be rolled out sometime later this year. Where can we see some kind of upside surprise if macro stays at the current level?

Sasan Goodarzi: Yes. Thanks for your question, Siti. So a couple of things. One, as you heard from Michelle, we took the current sort of trends that we were seeing in sort of end of October into November into account. But we also very intentionally included further conservatism, deterioration just to be prudent. And so when we look at things around delinquency rates and unemployment, which is really what financial institutions look at to make future decisions, although they are at historical lows, the assumption is that they’re going to deteriorate. And so we just assumed that they will significantly deteriorate, and we wanted to include that in our go-forward guidance. We take a lot of pride in the commitments that we make at the Company level, and we want to make sure that we’re very prudent in terms of the assumptions that we made with the guidance going forward.

With that said, I think what I would amplify is our innovation that we talked about at Investor Day. Beyond things like Karma Guarantee, we are actually — we have launched, it’s almost at full scale, something called the Marketplace, where we’re giving more exposure to personalize experiences around cards and personal loans to our members. And now with the integration of Mint and Credit Karma, which was part of our refreshed Big Bet three vision that we talked about at Investor Day, we expect in the future to have additional sort of capabilities and innovations for our prime customers, which has not been our sweet spot in — on the Credit Karma platform. So we are leaning into our innovation and those possibilities. We are not counting on any of that impacting the growth rate that you just heard from Michelle and I for the fiscal year, and we just simply believe that’s the right thing to do.

Siti Panigrahi: Great. And then a quick follow-up on the small business side. That’s pretty impressive quarter, and it grew 19% organically. And if I look at your guidance for remaining three quarters, you just have to grow 14% to hit your guidance. You already — like you talked about price mix shift and — or you already raised pricing 10% to 25%. So what are you seeing in the small business side? And what are your assumptions for the remaining of the year?

Sasan Goodarzi: Yes. Sure. Absolutely. First of all, I would start by saying we have a lot of visibility into things around consumer spending, which is charge volume. We see the number of employees, whether they’re going up and down. We see a number of hours worked. We see cash reserves. And of course, there’s our metrics around acquisition, retention, payments and payroll volume and also what we see across Mailchimp. And what we’re seeing across the board is a continued flight to digitization. If you use our payments capability, you get paid faster, and cash flow is more critical in this environment. If you use our payroll capabilities, you’re actually able to reduce errors and pay your employees and have money moved from your bank account to their bank account same day versus two weeks in advance.

With the use of innovation that you’ve heard from us on Mailchimp, we’re actually starting to see customer growth tick up. And so those are just illustrative examples are — we’re just continuing to see based on our innovation a flight to digitization, which is the strength that you heard from us in the first quarter. And we expect that momentum to continue the rest of the year. And we remain steadfast on our guidance until we see more quarters, but it is not at all about our sentiment about small business. We actually feel very good about what we’re seeing across the board in small business.