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Intuit (INTU)Stock (Computer Software Industry, Financial Services Industry)
Intuit's strategy has been to focus on customer satisfaction and simplifying the user experience. Despite the strong performance of its two major products, the company spends 80% of its R&D budget on the continued development of Quickbooks and TurboTax. The company has also positioned itself to be a major player in the growing online market, with TurboTax and Quickbooks both offering online editions. The recent acquisition of Digital Insight (a provider of online banking services) and pending launch of FinanceWorks plays into this strategy as well. However, the online market for tax preparation has become more competitive than the retail one, and recent server problems have damaged TurboTax's credibility, a concern for a company focused on user experience. To maintain growth, the company will have to continue satisfying current customers with new product cycles and add-in services, as well as fend off low-cost competition online.
[edit] Company OverviewIntuit has five business segments that it divides into three categories:
The recent acquisition of Digital Insight, completed in February of 2007, adds a sixth business line to the company: Online Banking. This will presumably create a fourth category in its business model.  [edit] Small BusinessThe Small Business division generated 43% of 2006 revenues, and it consists of the Quickbooks product line and Payroll and Payments services. Quickbooks, Intuit's accounting software for small and medium businesses, alone represented 23% of total revenues in 2006. The software is offered in differently priced editions tailored to specific markets, such as contracting, manufacturing, and retail. Quickbooks dominates the small business market, with an 89% market share in 2006—a 1% increase over the previous year, despite Microsoft's well-publicized entrance into the market in September 2005. Intuit company reports estimate that there were approximately 26 million small businesses (those with less than 500 employees) in the United States in 2006 overall and that 6 million new small businesses are launched annually (while 5.5-5.7 million close, implying an annual growth of 300-500 thousand businesses). Despite its current dominance of the existing market, Intuit estimates its current penetration of the potential market at around 30%, suggesting that there is ample room for continued growth. There is also great room for growth internationally. Intuit reports that roughly a third of its current customers conduct business globally, while it estimates that the international market has some 325 million small businesses, with 17 times the yearly number of new openings than the US market. The Payroll & Payments (P&P) division consists of various processing service add-ons for Quickbooks available for a monthly fee. Growing from 16% of revenues in 2004 to 20% in 2006, P&P helps drive sales growth: a connection with the customer is first established through Quickbooks and subsequently strengthened with the addition of services, helping Intuit retain customers and get further value from previous sales. P&P also holds considerable potential for growth: Intuit reports having 967,000 Payroll customers in 2006, out of the approximately 2 million Quickbooks customers for which it believes its payroll services would be useful. Similarly, the company estimates that its 167,000 Payments customers represent only a 10% penetration among Quickbooks users who accept credit cards. [edit] TaxIntuit's Tax division generated 42% of 2006 earnings, and it consists of the company's Consumer Tax and Professional Tax products and services. The Consumer Tax segment, earning 30% of 2006 revenues, consists of TurboTax, Intuit's consumer tax preparation software. It currently dominates the software/online tax preparation market, the fastest-growing segment of tax preparation overall and the segment most likely to attract young, first-time filers. TurboTax had a 79% share of the retail market in 2006 and an estimated 50% of online sales. There were 135 million tax returns filed in 2006, which, in addition to state returns, puts the potential market at around 240 million returns. However, 61% of returns are still filed by tax preparation professionals, including CPAs, and companies such as H&R Block (HRB) and Jackson-Hewitt. The remaining 39% of filers are either do-it-yourself customers using software or online solutions or customers who submit paper forms. TurboTax currently commands only an estimated 3-4% of the total dollar share of the considerably fragmented tax preparation market, leaving Intuit considerable opportunity for growth. The Professional Tax segment, earning 12% of 2006 revenues, consists of Intuit's professional tax software. It is primarily made up of its ProSeries and LaCerte products, which are marketed to smaller businesses not inclined to develop their own internal solutions. Intuit has roughly a 25% share of the professional tax preparation market. [edit] Other BusinessThe Other Business segment represented 15% of 2006 revenues; of this, less than 5% was from international sales. Largely consisting of revenue from the sale of Quicken, Intuit's personal finance management software, this segment also includes revenues from versions of products Quickbooks, Quicken, QuickTax, TaxWiz, and ProTax sold in Canada. [edit] Partnerships and AcquisitionsIntuit completed its acquisition of Digital Insight in February of 2007. The merger marked Intuit's entrance into the online banking, as well as further movement towards the software-as-service platform, which it has begun to explore with its Payroll & Payments offerings. The company plans to release Personal FinanceWorks in the summer of 2007, followed by Small Business FinanceWorks in the fall. Intuit announced the acquisition of Electronic Clearing House (ECHO) shortly after its announced purchase of Digital Insight. However, this merger was called off by mutual agreement in March of 2007. The acquisition was intended to further bolster Intuit's Payments offerings. Intuit also transferred its complete payroll processing customers (businesses outsourcing their entire payroll operations) to Automatic Data Processing (ADP) in early 2007, representing some 25,000 customers. The move is intended to allow Intuit to focus development on its tiered Payroll offerings, though it has affected short-term revenue. Intuit recently entered a partnership with Google (GOOG) to integrate additional features into Quickbooks 2007, including desktop search, Google Maps, AdWords, and Google Base. This partnership is another move to strengthen Intuit's position in the developing online finance market. [edit] Trends and Forces[edit] Seasonal ReturnsDue to the nature of tax season and the annual product release cycle, the performance of Quickbooks and TurboTax is highly seasonal. Traditionally, Intuit has reported strong earnings in the second and third quarters of the fiscal year (1/31 through 7/31), while posting losses in Q1 and Q4. However, this may change in the near future, thanks to the earlier release of Quickbooks 2007, changing filing habits among TurboTax Online customers, and the pending releases of new software (creating new product cycles) in the summer and fall. [edit] The InternetWhile retail still comprises the majority of TurboTax sales (5.5 million units, versus 5.2 million paid federal units online), TurboTax Online is growing much faster, with 58% year-over-year growth in 2006 as compared to 4% YOY growth in retail sales. Intuit also reported record demand for Quickbooks Online Edition in the second quarter of fiscal 2007. The company's acquisition of Digital Insight and the pending release of their online banking software is another move towards capitalizing on the emerging online financial market, as consumers become more comfortable with conducting financial transactions online. This new market has also provided new challenges. While the retail version of TurboTax has a sizable cost advantage over professional tax preparation firms, it faces considerable price competition online, where lower startup costs and fewer barriers to entry have allowed a number of low-cost competitors to enter the field. Online filing is also vulnerable to changing user filing habits, with more and more customers filing later in the season (a trend that has been noted industry-wide). This increased traffic at the end of tax season led to a well-publicized debacle on April 17, 2007, the final day to file taxes for 2006: Intuit reported 1.28 million successfully processed returns (roughly twice as many as the previous year), but their overloaded servers turned several hundreds of thousands more last-minute filers away. The IRS allowed these customers special permission to file after the deadline, and Intuit refunded user fees, at an estimated cost of $10 million. The negative publicity from this event could affect TurboTax Online sales in 2008. [edit] CompetitionTurboTax faces a wide variety of competitors in a fragmented tax preparation market. With H&R Block's TaxCut software as its only direct competitor, TurboTax dominates the retail market with four copies sold for every copy of TaxCut, despite TaxCut's lower cost. TurboTax also has a retention rate of around 75%, and thus most competition with TaxCut is over new users. Online, TurboTax is facing increasing pressure from TaxCut, as well as ad-supported TaxACT and other low-cost competitors. TurboTax also competes indirectly with traditional tax preparation services, such as H&R Block (HRB), Jackson-Hewitt, CPAs, and local mom-and-pop accounting services. Traditional services still account for the majority of tax returns filed, despite the cost advantage of TurboTax and other DIY methods. 
Intuit is most focused on targeting non-consumers, i.e., tax filers and small businesses who still prefer to work with a pencil, paper, and spreadsheet. With its growth strategy focused beyond its immediate competitors to capturing customers from the larger market of imperfect substitutes, the company does not attempt to compete using price leverage. TurboTax carries a price premium over TaxCut, and the standalone version of Small Business Accounting is less than half the price of the cheapest Quickbooks offering.
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