With a mission to “power prosperity around the world,” California-based Intuit (INTU) develops financial and compliance management software for private individuals as well as small and medium-sized businesses. The company’s most iconic products include QuickBook, TurboTax and Mint, serving roughly 50 million customers primarily in the U.S. As of fiscal 2019, small business clients, consumers and “Strategic Partners” (i.e., professional accountants) represent approximately 52%, 41% and 7% of the total sales, respectively.
Intuit was co-founded in 1983 by Scott Cook, who came up with the idea when his wife was complaining about the bureaucratic difficulty of paying the bills. Under his leadership, Intuit has grown into one of the world’s most innovative financial technology companies. He is currently on the Board and owns over 3% of total shares outstanding. We noticed that Cook was also among the early investors in Amazon (AMZN), eBay (EBAY) and Snapchat.
The past few years marked a pivotal moment for Intuit as the company successfully transformed from a desktop software provider to a cloud-based product and service platform. Looking at the revenue breakdown as of fiscal 2019, we see that the desktop ecosystem accounts for over half of the revenue at the Small Business segment and a smaller 7.2% at the Consumer segment. The remaining portion is mostly recurring, derived from the online ecosystem, and still has sizeable room to expand. In addition to higher predictability, the SaaS model can offer higher profitability by cutting distributions and logistics.
Intuit provides products and services that require pre-payments, leading to higher free cash flow than net income in a typical year (see below).
The company develops its competitive moat through high switching costs and a two-sided network effect to defend its fast-growing, high-margin and cash-rich platform-based ecosystem. Once a user becomes familiar with the workflows in Intuit’s software, it places a high bar on relearning tools for a different system. Migrating crucial historical data is another consideration in case of a switch. Additionally, the more third-party software and accountants that interact with Intuit’s platform, the harder it becomes for clients to move over to a new platform. Overall, both the Small Businesses and Consumer segments achieved a retention rate close to 80% over the past year.
According to the chart below, Intuit consistently delivered superior returns on assets for the past decade. The key moat indicator also improved steadily during the last couple of years, outperforming peers such as software giants Oracle (ORCL) and SAP (XTER:SAP) as well as more niche-focused players like Constellation Software (TSX:CSU) and Sage Group (LSE:SGE).
Conceptually, the business at Intuit is sensitive to economic cycles, but the data (see below) shows that the revenue and operating income were only mildly impacted during the last two recessions, implying some resilience due to a robust recurring revenue model.
During fiscal 2019, fiscal 2018 and fiscal 2017, international markets contributed to less than 5% of Intuit’s total revenue. The company may someday invest more resources into its overseas expansion initiatives, but we would like to stay cautious on this growth dimension, as the products and services, by nature, require in-depth localization.
At the same time, the management plans to invest in innovations (e.g., Intuit Operating System) to accelerate growth. It appears to us that the management puts a lot of emphasis on artificial intelligence, which is unquestionably a trendy domain but also one of our least favorite due to its high disruptiveness and intense competition. Otherwise, in the U.S. alone, we see a sizeable room for both QuickBooks (a 12% market share) and TurboTax (a 27% market share) to further penetrate the market in their respective industries.
Disclosure: The mention of any stock in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any stock mentioned in the article.
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