Intuit Needs To Acquire Into SaaS

Yesterday, Intuit Inc. (NASDAQ: INTU), the tax preparation and small business accounting software maker with annual revenue of $3.1 billion, reported mixed second quarter results that beat earnings estimates. We recently looked at the latest US employment statistics reported by ADP. Intuit is another company that provides a fair idea about the health of the economy. Let’s take a closer look at its results.

Q2 revenue was down 5% to $791 million. GAAP operating income was $110 million or $0.26 per share, down from $174 million or $0.34 per share in Q208. Non-GAAP operating income was $172 million or $0.34 per share. Analysts expected earnings of $0.27 per share on revenue of $796.2 million.

Deferred revenue was $472.0 million, up $135.0 million from Q208, mainly due to the deferral of revenue from Q2 to Q3 for the e-file bundling and growth in its subscription-based businesses. Intuit usually makes a profit in the second and third quarters leading up to the tax filing deadline in April. However, it doesn’t recognize payment for its TurboTax program (sold online) until customers submit returns. Without the timing changes of $58 million between Q2 and Q3, total revenue would have grown 2%.

Intuit bought back shares worth $35 million in the quarter and has $400 million left in the current authorization for share repurchases. It ended the second quarter with $802 million in cash and investments. It expects to generate about $900 million in operating cash for the fiscal year. Capital expenditures were $50 million, in line with expectations and is on track for its estimate of $200 million capital spending for the year. To achieve this, it has slowed hiring, adjusted performance-based compensation, shifted marketing dollars and cut back on travel and off-site meetings.

By segment, revenue from Payroll and Payments increased 14% to $158 million, Accounting Professionals grew 14% to $133 million, and Financial Institutions revenue (including Digital Insight) grew 5% to $76 million. On the other hand, QuickBooks revenue declined 2% to $164 million as the recession hurt small businesses. Consumer Tax revenue declined 25% to $187 million, and without the deferral of $70 million to Q3 related to federal e-filing, revenue for this segment would have grown 4%. Other Businesses revenue was down 21% to $73 million. In the total Small Business segment, second quarter revenue was $322 million, up 5%. Adjusting for the acquisitions of Homestead and ECHO in FY2008, revenue would have been flat for Q2.

Intuit also reported that demand for its web-based TurboTax software has increased 39% year-to-date while the desktop software has declined 14%.

For the third quarter Intuit expects revenue of $1.38 to $1.46 billion, or growth of 5 to 11%. GAAP operating income is expected in the range of $723 to $778 million, or growth of 7 to 15% or EPS between $1.38 and $1.49. Non-GAAP EPS is expected to be between $1.57 and $1.68, or growth of 13 to 21%. Analysts expect a profit of $1.67 per share on revenue of $1.48 billion.

Based on its performance in QuickBooks, Real Estate Solutions and Quicken, Intuit has also cut its outlook for 2009. Revenue is expected in the range of $3.13 to $3.25 billion, or growth of 2 to 6%. Earlier outlook was for growth of 6 to 10%. The company expects GAAP operating income between $682 to $735 million, or growth of 5 to 13% and GAAP EPS of $1.32 to $1.43, or a decline of 6% to growth of 1%. Non-GAAP EPS is expected to be between $1.78 and $1.89, or growth of 11 to 18%.

Intel also says it would be on the lookout to invest its cash in inorganic growth opportunities that make good strategic and financial sense. As I pointed out last quarter, SaaS acquisitions would make excellent sense and some options the company can consider include Paycycle, Bill.com, Everest and Intacct from the Deal Radar Series.

The stock is currently trading around $21 with a market cap of around $7 billion. It hit a 52-week low of $20.18 on December 1.

Intuit is sitting on a significant pile of cash, and there is every indication, that in its customer base, SaaS is gaining ground. Does it really take a rocket scientist to figure out that Intuit should go acquire some SaaS companies? There are more than 500 of them, and surely, Intuit’s product marketing and corp dev teams can go do a deep dive into the segment to identify the best fits?