How Intuit Could Outgrow ADP and H&R Block

Intuit (NASDAQ: INTU  ) will release its quarterly report on Thursday, and investors have watched with glee as the stock has soared to all-time highs throughout the past several years. Once seen as a niche software provider, Intuit has sought to expand its business to pose a stronger competitive threat not just to tax-preparation specialist H&R Block (NYSE: HRB  ) but also human-resources and payroll services rival Automatic Data Processing (NASDAQ: ADP  ) .

Intuit makes the popular TurboTax tax preparation software package, as well as the QuickBooks accounting software that many small and medium-sized businesses use to manage their finances. But Intuit isn't content to stay in that lucrative niche and has been looking for ways to use its customer base as a launching pad to provide a wider array of business-support services. As the economy recovers, Intuit has the potential to capture customers that had given up their payroll and other HR services in order to cut costs. But ADP and fellow HR processor Paychex (NASDAQ: PAYX  ) aren't likely to let Intuit grab up their business without a fight. Let's take an early look at what's been happening with Intuit over the past quarter and what we're likely to see in its report.

Stats on Intuit

Analyst EPS Estimate

($0.10)

Year-Ago EPS

($0.03)

Revenue Estimate

$603 million

Change From Year-Ago Revenue

(6.8%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Intuit earnings recover this quarter?
In recent months, analysts have dropped their views on Intuit earnings very slightly, cutting estimates for the quarter ended in October and full-year 2014 by a penny per share. The stock has nevertheless climbed sharply, gaining 16% since mid-August.

Intuit reported solid results in its quarter ended in July, with break-even adjusted earnings on a better-than-expected 12% jump in revenue. The company saw online subscription volume to its QuickBooks software rise by 28%, and Intuit's international expansion efforts really paid off with an 80% jump in its foreign subscriber base. With so much of Intuit's business coming from its tax-prep software, its earnings patterns mimic those of H&R Block, with most profit coming in the quarter that contains April.

But where Intuit really sees growth is in its small-business group segment, where it competes more directly with Paychex and ADP. ADP was the most resilient of the HR and payroll-processing companies during the recession, as it tends to work with larger customers that aren't as vulnerable to swings in the economy. Paychex faces a much more direct threat from Intuit, as Paychex has a wider base of small-business customers that are natural targets for Intuit to poach for its own services.

The nice thing about the combination of Intuit's businesses is that it gives the company flexibility to pursue new initiatives. Intuit's attempts to move more toward software-as-a-service offerings mimic what ADP, Paychex, and many other providers generally are doing to ensure streams of recurring revenue. Yet Intuit's dominance in tax software gives it the ability to seek out competitive opportunities against H&R Block as well, especially if Intuit can target for tax-prep work the clients that are most likely to need other services from the company.

In the Intuit earnings report, watch to see how its subscription efforts are going. As long as Intuit stays on track, investors should ignore short-term revenue disruptions and instead focus on the company's long-term prospects against its competitors.

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