Intuit Moving Ahead With Connected Services Strategy

In fiscal 2008, Intuit’s (NASDAQ:INTU) new CEO, Brad Smith, announced the company’s connected services strategy, which targets a market where people and businesses are increasingly connected, whether through desktop, laptop, or handheld devices. Last year, Intuit made two major acquisitions – PayCycle (now Intuit Online Payroll) and Mint.com, that support this strategy. More than 56% of the company’s $3.2 billion in fiscal 2009 revenue came from connected services.

Both Mint.com and PayCycle are important acquisitions for Intuit. Mint.com was becoming a strong competitor to Intuit’s own Quicken service after attracting about 1.4 million subscribers in just two years and was adding almost 3,000 users per month. What was (and is) unique about Mint was that it made personal finance tracking very easy for small businesses and that too at no cost. It provides a unified view of how much one owes and spends and categorizes expenses, showing where one can save. Guest author Bob Walsh’s interview with Mint.com CEO Aaron Patzer is available here.

With the Mint acquisition, Intuit is moving strongly into online money management and budgeting. Yesterday, Intuit launched a new version of Quicken Essentials for Mac using Mint’s categorization technology. Additionally, in December, Intuit launched its first product for the Indian market, Intuit Money Manager, which is an online personal finance tool.

With the PayCycle acquisition, Intuit will be attacking the small business payroll SaaS market of companies with fewer than 20 employees. PayCycle has about 80,000 customers and its annual revenue in 2008 was $30 million. Paycycle combined with Intuit would be a strong threat for Paychex, which targets small businesses with fewer than 100 employees and has about 600,000 customers and $2.1 billion in annual revenue. PayCycle is significantly cheaper than Paychex, about one-third the cost. My interview with PayCycle CEO Jim Heeger is available here.

Intuit recently reported second quarter results that exceeded its guidance. Q2 revenue grew 8% to $837 million. It swung to an operating income of $139 million compared with a loss of $99 million last quarter and operating income of $111 million last year. The company repurchased shares for $250 million and has $350 million remaining on its authorization. Q1 coverage is available here.

Driven by the PayCycle acquisition, Intuit’s Employee Management Solutions revenue grew 12% while the Mint.com acquisition led to Other Business revenue growing 38%. Revenue from Financial Management Solutions was down 3%, Payment Solutions was up 14%, Consumer Tax Group grew 15%, Accounting Professionals was down 7%, and Financial Institutions grew 10%.

Based on its strong results, particularly in the tax business, Intuit raised its full-year revenue and earnings guidance. For fiscal year 2010, the company expects revenue growth of 6% to 9%, or $3.3 to $3.4 billion and operating income of $785 million to $825 million. For the third quarter, Intuit expects revenue growth of 7% to 12% or $1.51 billion to $1.59 billion and operating income of $811 million to $861 million.

The stock is currently trading around $32 with market cap of about $10 billion. It hit a 52-week high of $31.97 on January 15.

Intuit is looking to expand internationally also. It opened an R&D centre in India four years ago and is now launching a product for the Indian market, where it will be competing against the popular Tally software. Intuit plans to offer products that can run on low-end phones, doing away with the need for a computer, which micro and small businesses in India do not possess. Will it work?

I think the question facing Intuit is, how does it broaden its SaaS strategy? There are two choices: first, to broaden its market to businesses that are outgrowing QuickBooks, such as Intaact. However, it doesn’t seem as though Smith wants to pursue the larger business segment, and that rules out Everest and Bill.com as well. The second choice is to broaden the portfolio of offerings, especially in SaaS, to its current sweet spot of very small business. Will Intuit be getting into areas such as CRM, email, Web conferencing, and other functional areas? If so, one interesting acquisition may be RingCentral, which provides cloud computing-based business phone systems.  Last year, I interviewed its CEO, Vlad Shmunis, who shares the company’s success story.

On India, though, I am wondering if Intuit should look at acquiring a mobile payment company like Obopay. Any thoughts?