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Intuit Needs a Painful Business Model Re-engineering

Posted on Wednesday, Feb 27th 2008

Last week, Intuit Inc. (NASDAQ: INTU) reported its financial results. Earlier coverage is available here and here, where I have discussed that Intuit needs to move to a SaaS model, and get more of an International business going.

Revenue for the traditionally strong second quarter grew 11% y-o-y and 87% sequentially to $835 million driven by the Digital Insight acquisition and strong performance in Consumer Tax. GAAP net income was however $115.2 million or $0.34 per diluted share, down 21% y-o-y. The decline in net income reflects the increased costs related to Digital Insight acquisition and marketing of Consumer Tax products as well as the deferral of ProTax revenue of $23 million to Q3.

Segment-wise, revenue from Consumer Tax grew 11% y-o-y to $248.3 million, QuickBooks went up 5% y-o-y to $175.4 million, and Professional Tax went down 19% y-o-y to $105.4 million (affected by the deferral). Payroll and Payments revenue was flat at $138 million and excluding the impact of the ADP sale saw a growth of 16% y-o-y. Financial Institutions revenue (including Digital Insight) was $72.3 million.

The economic slowdown has slowed down the sales in QuickBooks leading Intuit to revise its guidance. For fiscal 2008, it expects QuickBooks segment to grow between 5 and 7% (down from earlier estimate of 8 to 12%). Revenue for 2008 is expected to be in the range of $3.0 to $3.05 billion, or growth of 12 to 14%. 2008 GAAP EPS guidance has been reduced to $1.38 to $1.40 accounting for the Homestead acquisition and the non-renewal of R&D tax credit.
For Q3, Intuit expects revenue between $1.268 and $1.293 billion or y-o-y growth of 11% to 14% and GAAP diluted EPS between $1.23 and $1.26. For Q4, it expects revenue of $466 to $471 million or 8 to 9% y-o-y growth and a GAAP loss per share of $0.14 to $0.12.

The revision in the guidance sent its stock to a 52-week low of $25.86 on February 22. It is currently trading around $28 and market cap is around $9.3 billion.

I maintain my recommendation that the core business model at Intuit needs to shift to SaaS to give its stock the benefit of predictability that other pureplay SaaS vendors are enjoying. Today, it is still much more of a packaged software business, and in the small business customer base, this lack of visibility and predictability makes life complicated. It won’t be an easy shift, of course, but over the long term horizon, definitely worthwhile. Concur made the shift, and is now reaping the benefits. You can read about that experience in my conversation with Steve Singh, Concur’s CEO.

Similarly, if and when Intuit would have moved to a subscription model altogether, the company’s otherwise strong value proposition, customer-base, brand recognition – all assets of enviable magnitude – would make it a great investment, not just a great company.

In the interim, the instant gratification and predictability driven Wall Street will continue to punish the company, especially if the weakening economy causes them further headaches.

Chart for Intuit Inc. (INTU)

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