Intuit's Winning Season


By Alex Salkever Steve Bennett might be one of the few CEOs in the U.S. who couldn't wait for Apr. 15. That's because he heads small-business accounting and tax-software giant Intuit (INTU), best known for its popular Quicken personal-finance software -- and tax time is high season for sales of Intuit's products.

This April has turned out to be particularly good for Bennett, a former GE Capital executive. On Apr. 8, buoyed by stellar growth in sales of tax software and online home loans, Intuit raised its financial guidance for pro forma operating revenues in the third fiscal quarter ending Apr. 30 by $15 million, or 5 cents per share.

Now, Bennett is about to kick the company into overdrive. This summer, Intuit plans to roll out software code-named Hercules designed for businesses with 20 to 250 employees. The move targets a market segment worth over $15 billion -- one in which Intuit has had no real presence. At the same time, Intuit is starting to build software packages aimed at specific small-business sectors, such as accounting. The company has a hammerlock on small-business accountants across the country: Thousands tell their clients to use Intuit software.

STRONG NUMBERS. Amid the general software malaise, Intuit looks like a rock star. With its stock floating in the high $30-a-share range, nearly 20% below 52-week highs, Intuit could be primed for a nice run up in the near future (it closed around $39 on Apr. 17).

Intuit's revenues break down along five business lines. TurboTax and ProTax are tax-software packages for consumers and accountants. The unit has a growing online tax-filing component. Quicken Loans handles mortgages over the Web. Intuit also sells payroll services, paid for via monthly subscription fees. The small-business division comprises accounting packages for entrepreneurs. And the personal-finance division, home of the original Quicken, oversees consumer-accounting software.

In the second fiscal quarter ended Jan. 31 -- the company logs 70% of its revenues for the year in the second and third quarters -- Intuit showed both strengths and weaknesses. In the payroll segment, it clocked $40 million in revenues, a 32% jump from the same quarter in 2001. The Quicken Loans line posted $57 million in revenues -- a 181% increase over the same period a year ago, coming largely on the strength of the housing market and low interest rates.

IMPRESSIVE LEAP. In the tax division, the ProTax business boasted reported revenues of $139 million, up 28% year-over-year. But consumer tax-product revenues logged only $86.1 million, up a measly 3%. And Intuit reported just a 2% increase in revenues, to $98.2 million, at its core small-business software arm -- well below many analysts' estimates.

Despite a couple of lackluster showings, growth in other segments more than outweighed the damage. Intuit racked up a 19.6% revenue jump, to $547.2 million, the second fiscal quarter of 2002, vs. $457.5 million in the same period in 2001. A much more impressive leap was evident in the bottom line. Intuit's net income after extraordinary items grew to $119.9 million in the second quarter of 2002, from $26.6 million in the year-ago period -- a hefty 350.8% increase.

And things should only get better in the third fiscal quarter. Aside from the enthusiastic preannouncement boosting third-quarter earnings expectations, many analysts expect Intuit's tax-division revenues to soar, since online filers don't pay for anything until they hit the send button on their e-tax returns. A large number of slowpokes probably waited until the last minute to submit their returns. Likewise, sales of QuickBooks software for small businesses are expected to grow more quickly, as Intuit announced several key upgrades to be released in the third quarter.

BIG-NAME RIVALS. Intuit still faces some potential pitfalls. By targeting more substantial small businesses, it's on a collision course with Microsoft's (MSFT) Great Plains business-management software unit, which is rapidly upgrading its Small Business Manager suite of products. Oracle (ORCL) is another competitor. Larry Ellison's troops have recently scored rave reviews for their revamped version of a Web-based suite of small-business accounting and customer-relationship-management services.

Competitors doubt that Intuit can swim upstream. "Intuit comes from a retail environment and a recommender environment with CPAs. When you get into the middle market, implementations are more complex, and there's often a requirement for customization," says Jeff Edwards, director of global solutions at Great Plains. "Intuit doesn't have that background, and acquiring a channel partner to do that is something that takes quite a bit of time to build up."

Rising mortgage rates could also slow the home-loan market and take another bite out of Intuit's earnings. And with its chief competitor in the online tax-filing business, HR Block (HRB), growing quickly, Intuit's TurboTax could lose market share, now at 70% of all online filings.

"HELD HOSTAGE." Intuit also will have to take care not to alienate its own customers. In the past, QuickBooks users have voiced their ire when Intuit herded them toward fee-based online services in lieu of features formerly included as part of software packages. "It's not the steady stream of fees I object too, but the unilateral ability to change the fees, and very high switching costs imposed on us.... We can easily be held hostage," explains Tony Scarpelli, a computer consultant who specializes in QuickBooks installation and customization.

Bennett isn't worried about competition or losing customers. He claims that Intuit's products, when compared to those of its rivals, are so "drop-dead easy that they sell themselves." QuickBooks now has 250,000 users with 20 or more employees, and Bennett says they'll be an easy sell for Intuit's QuickBooks Hercules. "What's about the most miserable thing you can do if you are a small business?" he asks. "No. 1 on the list is converting accounting systems."

Standard & Poor's (like BusinessWeek Online, a unit of The McGraw-Hill Companies) gives Intuit its top 5-STAR (buy) rating. According to Adam Holt, a senior analyst at J.P. Morgan HQ, Intuit managed to increase its profit margin to 34% in the second quarter of 2002, from 31% in 2001's second quarter. "That's a pretty substantial figure," says Holt, who has a buy rating on the stock.

Intuit seems to be on track to hit revenue targets of $1.5 billion for the year, up from $1.26 billion in 2001. And it should easily beat last year's net income of $184.1 million for the full fiscal year ending in July. Investors might want to think about adding Intuit to their portfolios. The likely worst case: The stock goes sideways. Best case: Intuit provides some nifty capital gains to plug into TurboTax in April, 2003. Salkever is technology editor for BusinessWeek Online


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