Analysis: Intuit's small-business bets paying off

NEW YORK: For some 20 million Americans, tax season means powering up the computer, opening a TurboTax software program and, if all goes well, getting their finances in order.

As the company that makes the top-selling tax program, Intuit Inc - a software company that develops financial and tax preparation software and related services for SMBs, accountants and individuals - can hardly complain about the process. Then again, companies best known for a single, seasonal product do not often witness their stock price rising 50 per cent in one year and more than 100 per cent in two years.

Part of Intuit's secret has been its success in building a small-business division - one that helps companies process credit-card transactions, manage employee payrolls and build websites - into a $1.5 billion-a-year operation. It is now larger by revenue than the company's consumer tax division.

While Intuit's tax products are still more profitable because of their high margins, its small business side is proving to be a big attraction to investors, especially because it can spearhead the company's international growth.

Just 5 per cent of Intuit's revenue comes from outside the United States and analysts say that services for small businesses have a better chance of succeeding internationally than the tax side, which would have to cater to different tax codes in individual countries.

Plus, Intuit's small-business side will increase its revenue by “double-digit rates for the foreseeable future,” said Kiran Patel, the head of Intuit's small-business group. 

Fast Growth

The company has seen its small-business unit grow faster than the overall economy, which is a "good sign" for future growth, said Wedbush Securities analyst Gil Luria.

"If they've done so well in an environment that was tough for both the consumer and the small business, imagine how well they can do when those segments really recover," Luria said.

Some Intuit shareholders, such as asset management firm Neuberger Berman, are betting that a recovery in small-business spending will give the company an added boost.

"As the economy improves, you'll see more new business start-ups that will buy Intuit software, while existing businesses will be looking to upgrade their software," Neuberger Berman analyst Hari Srinivasan said.

Yet Intuit risks losing market share to competitors, including start-ups that design cheap, easy-to-use applications that encroach on their small-business territory, analysts said.

The company first got into small-business services in the early 1990s when it realized people were using its Quicken personal finance software to run their businesses.

Intuit acquired several companies over the years to expand its small-business offerings, including website business Homestead Technologies, and PayCycle, a payroll software company. But analysts said Intuit has bought companies in the past that have not increased earnings and investors would like to see its growth come from its own technology, Luria said.

For now, the key product in its portfolio is QuickBooks, the accounting software that produces half of the unit's revenue.

Chief Financial Officer Neil Williams said that when investors try to gauge the health of Intuit's small business unit, they make the mistake of studying sales of boxed copies of QuickBooks.

Sales of the disks are being outpaced by sales of the online version, he said.

“It's not like customers buy a product and you never see them again -- they are much more connected through some of our online services,” Williams said.

Company executives also stress Intuit's focus on cloud-based services, a hot area that appeals to investors but is also likely to be intensely competitive as companies such as Salesforce.com and Google Inc aggressively pursue it.One cloud-based product attracting attention is called Intuit Trends, which allows small businesses to compare their financials to other companies in their sector.

"Let's say I'm a florist and I'm wondering what other florists' business numbers look like, I can look up revenue for florists in the U.S. and see how much they're spending on labor and transportation," Intuit's Patel said.

Executives said these services will help Intuit to keep diversifying beyond its traditional boxed products for tax prep and accounting.

"This is something the market is beginning to get and appreciate but it's still kind of evolving," Williams, the CFO, said.