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Intuit Bets on SaaS, Not Yet on International

Posted on Thursday, Oct 25th 2007

In some of my earlier posts, I have talked about how Intuit has successfully penetrated SME with its killer app of small business accounting software. You have also been reading my interview with Jim Heeger, who has discussed Intuit’s historical strategy in a fair bit of detail. In this post, I will look at Intuit’s current financials and strategy in more detail.

Intuit (Nasdaq: INTU) is the leading provider of accounting and tax solutions in the SME space with a lion’s share of the market, revenue of $2.67 billion, market cap of $10.62 billion, and 8,200 employees in fiscal 2007. Founded in 1983 and based in California, its business is organized into six segments: QuickBooks, Payroll and Payments, Consumer Tax, Professional Tax, Financial Institutions and Other Businesses.

Its core products are QuickBooks, Quicken, and TurboTax. For professional accountants, it offers tax preparation software suites, ProSeries and Lacerte. Its web-based products include QuickBooks Online Edition, QuickBooks Online Payroll, QuickBooks Assisted Payroll Service, Complete web-based Payroll, Turbo Tax Online, consumer and professional electronic tax filing services, Quicken.com, QuickBase, and Digital Insight outsourced online banking applications and services.

In February 2007, Intuit acquired Digital Insight Corporation for $1.34 billion. This acquisition of an outsourced online banking applications and services to mid-sized financial institutions and credit unions will help Intuit establish itself in the Software-As-A-Service (SaaS) market, a segment where the company is under some threat from competitors like PayCycle, led by former Intuit executives. In fact, for a while, PayCycle provided Intuit’s web-based payroll solution, but now that service is bring offered directly by Intuit. The market for web-based Payroll offered as a SaaS is extremely compelling.

Fiscal 2007 also saw it selling certain assets in its Complete Payroll and Premier Payroll Service businesses to ADP for $135 million. In August, it sold its Intuit Distribution Management Solutions (IDMS) business for $100 million.

On the financial front, Intuit reported a 17% increase of $379.9 million in its annual revenue in fiscal 2007 mainly due to its Digital Insight acquisition and revenue growth in its Consumer Tax segment. Net income from continuing operations was 443.5 million, an increase of $62.5 million or 16%. Diluted net income per share from continuing operations increased 18% to $1.25. In fiscal 2007, Intuit provided around 1.5 million free web-based federal returns under the Intuit Tax Freedom Project.

Segment wise, Financial Institutions segment, which includes Digital Insight, had revenue of $150.4 million in fiscal 2007, increasing 516% from just $24.4 million in 2006. Consumer Tax revenue increased 15% to $106.8 million due to growth in federal online units. QuickBooks segment revenue increased 11% to $59.3 million due to unit growth and favorable product mix. Payroll and Payments revenue increased 12% to $54.6 million due to growth in the QuickBooks Payroll and the Payments customer bases, favorable Payroll product mix and higher transaction volume per customer in its Payments business.

For the fourth quarter of fiscal 2007, Intuit reported revenue of $432.7 million, a 31% y-o-y increase. GAAP net loss was $13.6 million, compared with $18.9 million in Q4 2006. Losses are the norm in the fourth quarter ending in July and also the first quarter ending in October as there is little revenue from its tax businesses. Its stock also fluctuates seasonally.

In fiscal 2007, it repurchased 17.1 million shares of its common stock for $506.6 million. It has $800 million in funds for future stock repurchases. In July 2006, its stock underwent a two-for-one split. Its stock is currently trading around $31.

While Intuit has enjoyed a position of relatively undisputed leadership in the small business financial software and services arena that includes accounting, tax, and payroll, with ADP and PayChex presenting some competition in the Payroll area, I am interested in seeing an International strategy from the company. With entrepreneurship booming in China and India, I would like to see Intuit acquire companies (if they exist) to solve these basic problems of running small businesses in those geographies. If such companies don’t quite exist yet, then these are ripe entrepreneurship opportunities for entrepreneurs in India and China, and it is quite possible that Intuit could become a desirable corporate investor in that endeavor.

I like the SaaS bets, but I want to see an International strategy from the company.

Intuit Inc. (INTU)

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