Intuit: Solving Problems Intuitively!

Intuit is a leading American software company whose products help small businesses, self-employed, consumers, and professional accountants, in managing their finances and automating tax filing. The company has a dominant presence in the US and Canada and has begun expanding into newer geographies.

Intuit’s Business Segments:

Intuit’s business is segmented along three lines which are defined by the end user usage.

Small Business & Self Employed (52.75% Revenue Contribution – Margins around 40%)

The company’s marquee product, Quickbooks (QB), serves small businesses and the self employed by helping them track income and expenses, creating and sending invoices, managing and paying bills, and generating and reviewing financial reports. Simply put, Quickbooks is a leading accounting software with a market share of over 60% in the US and Canada. It is available via an online ecosystem (using AWS) or via the traditional desktop ecosystem (traditional CD-ROM – manufacturing requirements for this ecosystem have been outsourced).

Today, the online ecosystem has been growing quickly, largely due to new user adoption and migration of users from the desktop ecosystem.

Quickbooks serves as an open platform where third party developers can create integrable online and mobile apps. Some of the most popular services such as PayPal, Shopify, Square, Salesforce, ADP, and Hubspot etc have been integrated into QuickBooks.

Some other core offerings include (these offerings are integrated with QB):

The company offers different variants of QuickBooks to its customers based upon their requirements. Some of the key variants/value-added variants are:

Consumer (40.83% Revenue Contribution – Margins around 60%)

Intuit helps consumers with their income tax preparation and filing through their marquee product, Turbo Tax. It also offers a personal finance ecosystem through their product called Mint.

Turbo Tax enables customers to prepare and file both state and federal taxes quickly and accurately. It is easy to use yet sophisticated enough to handle complex tax returns.

As a value-added service, the company offers Turbo Tax Live, wherein the customer can get live advice from tax professionals. Turbo Tax is a highly seasonal product with upswings in Q2 and Q3 synonymous with the US tax filing season of November-April. 

Today, Turbo Tax contributes to roughly 30% of total IRS returns. It has a 66% market share in the ‘Do-it-Yourself’ tax prep and filing market.

ProConnect (6.42% Revenue Contribution – Margins around 65%)

(earlier known as Strategic Partner)

Through its range of tax prep and filing products (Lacerte, ProConnect, ProSeries), the company helps professional accountants tackle the tax season swiftly and accurately.

Its core products are:

Lacerte – Full-service product for accounting firms that can handle the most complex of tax returns.

ProConnect – Ideal for professionals catering to tax requirements of small businesses. Integrates directly with QB Online offerings.

ProSeries – Ideal for moderately complex tax returns.

Credit Karma

Credit Karma is a personal finance company that was acquired by Intuit in December of 2020 for a consideration of $7 Billion (Cash + Intuit Stock). Today, Credit Karma is a new business segment for Intuit. The growth strategy is to continue to grow Credit Karma’s business segments of,

What does Intuit get from the acquisition other than Credit Karma’s core businesses?

Credit Karma’s core offerings continue to remain free. The company generates revenue through advertisement fees (cost per click / cost per lead) for the different financial (third party) products that are offered to the customer.

Competitive Advantages and Economic Moats enjoyed by Intuit:

Market Leadership and Brand Equity

Intuit’s core products of QuickBooks and Turbo Tax enjoy significantly strong brand equity, allowing the company to grow its user base. Its products are the epitome of reliability and trust in the accounting and tax software segment. The company undertakes significant marketing efforts through different mediums to bolster their brand image (Digital marketing, SEO, Pay Per Click, Social & Affiliate Marketing, Mobile Marketing, Email Marketing, TV, Radio, Billboards, Magazines, Newspaper etc).

Product-Market Fit and High Switching Costs

Playing on the increasing trend of ‘Do-It-Yourself’, the company has positioned its products incredibly well. Its products are easy to use, loaded with features, one-stop shop, reliable, and offer excellent customer support.

Most small business and self-employed people prefer ‘DIY’, however, when it comes to tax preparation and accounting, there tend to be some apprehensions regarding ‘DIY’. Understanding this, the company offers ‘live’ sessions with professionals (over 600+ professionals) for their QB and Turbo Tax platforms, culminating into a combination of ‘DIY’ + ‘Professional Help/Advice’.

These professionals are required to clear Intuit’s own certification courses which tend to be updated annually as per changes in the underlying software of QB and Turbo Tax. This leads to low-mild switching costs for these professionals as they are required to constantly remain updated with new features/changes.

It is my understanding that the company has been able to understand the real market and has built products that generate a perfect product-market fit. Intuit’s ability of scaling their platforms is remarkable and has allowed the company to continue premiumization of its products.

By addressing the needs of businesses across the entire business ecosystem, Inuit has been able to tightly integrate itself with its customers (both professional accountants as well as consumers and small businesses) and has retention rates of over 80% , a testament to the high switching costs that the company has been able to nurture and develop.

Principal-Agent and Customer Base

The company offers products to both though the principal (Small Businesses / Self Employed / Consumer) and the agent (Accountants / Tax Professionals). This allows the company to tap into both pockets of end-users.

Intuit enjoys a significantly large customer base of 57 million (pre acquisition of Credit Karma) which makes its products an attractive proposition for third party app developers. This has enabled Intuit to integrate other ‘essential’ services within their own platform (think PayPal, ADP, Shopify, Square, Salesforce etc).

Risks Faced by Intuit:

Changing Regulations and Government Intervention

Changing tax laws at the state and federal level mean that Intuit needs to have the ability to incorporate the new tax structures with accuracy within a rigid timeframe. Failing to do so could put the company into trouble and tarnish their brand image.

Currently, Intuit and its peers have an agreement with the US Government called ‘Free File Alliance (FFA)’, under which Intuit and its peers have agreed to provide free tax prep and filing for eligible taxpayers. This is essentially a lobby led by Intuit that is trying to prevent the public sector from entering this space.

Hence, if the FFA were to dissolve, the government would be the largest competitor for Intuit and its peers, leading to a large impact on the ‘Consumer’ business segment (TurboTax).

Technological Obsolescence

For a software product company, technological obsolescence is a key risk. If such a company slows down its innovation efforts, it does not take long for new competitors to leapfrog ahead of them. However, Intuit has been pumping significant amount of money into bringing out new features and better products. Furthermore, accounting and tax software’s tend to be complex with the need for extremely low margin of error. Thus, technological development happens relatively slowly when compared to other software products.

Intuit has focused its efforts on the use of AI to make their products much easier to use and truly ‘intuitive’.

Competition

Intuit faces competition across all its business segments and some pricing pressure does exist. However, they have done incredibly well at defending their leadership position and gaining market share from others.

Key competitors (based on segments) include:

Small Business & Self Employed Segment – Xero, FreshBooks, The Sage Group PLC.

Consumer Segment – H&R Block, Free Tax USA, TaxSlayer, Credit Karma (acquired by Intuit).

ProConnect (Strategic Partner) Segment – CS Professional Suite (Thomson Reuter), GoSystems Tax.

The most able of competitors would be the Government (IRS) entering the space.

Seasonality

Intuit’s Consumer and ProConnect segments are highly seasonal in nature and perform strongly in the tax filing season (November-April) which is in Q2 and Q3. This is more of a business attribute rather than a true risk.

Opportunities:

Intuit’s Financials:

Intuit is a unique company that is a market leader in a niche and regulated market. It has been able to grow consistently over the past decade and is likely to continue to do so.

In the previous year, the company had taken on larger than average amounts of debt for general corporate purposes and for completing the Credit Karma acquisition (however, debt was not used). [BV D/E stands at 31%, MV D/E stands at 2.29%]

Intuit’s Valuation:

Intuit commands market leadership across its key products of QuickBooks and TurboTax. I expect Intuit to grow inline with the industry growth rates of 8-9% (for Accounting Software) and 10-11% for (DIY Tax Software). The underlying competitive advantages of the company, increasing premiumization (ARPC on uptrend), and cross selling opportunities (via Credit Karma – a new lever of growth) will help offset competitive pressures.

Putting these all together, I expect Revenues to grow at a CAGR of 8.73% (a fairly conservative estimate), and operating margins to remain relatively stable in the mid 20’s.

Cost of Capital is around 5.80% and Terminal Growth rate is 1.74%.

Using these as my inputs, my intrinsic value for Intuit lies between $207.39 and $234.84 per share.

Conclusion:

Intuit is a remarkable company that ticks all the boxes of a great well moated company. There are two factors that I feel one should keep in mind,

The difference between a great company and a great investment is the ‘price’ that is paid for the ‘value’. Unfortunately at today’s price of $ 373 per share, ‘value’ is amiss when compared to my intrinsic value of $207.39 and $234.84 per share!

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