Ah, April. As Americans debate whether it's less painful to visit the dentist than pay taxes and the IRS estimates that the total number of tax filers grew less than 1% in 2004, Intuit (NASDAQ:INTU) forecasts that revenues from TurboTax and SnapTax will grow a modest 5%-10% in fiscal 2005 -- much less than the robust 16% growth of the prior two years. With a high churn rate, a crowded marketplace, substitutes like the office accountant pal who does your return for free, and community-organized free-filing tax sessions, this is a tough market to be in, and 5%-10% growth is nothing to be ashamed of.
Besides, I think the ubiquity of another product, Quickbooks, will make it Intuit's main revenue driver in the years ahead. As a consulting accountant, I've noticed Quickbooks being used as an accounting program alongside the user's industry-specific business software. For example, several of our hotel and motel franchisee clients use a standard hotel industry package for the business side -- reservations, credit cards, front desk operations, and the like. To arrive at cash flow and profit and loss, however, they re-enter the same data in Quickbooks. They generally find Quickbooks easier to use than their industry package, it offers a more comprehensive accounting solution -- taking care of expenses, payroll, financial reporting, etc. -- and it is relatively cheap as an add-on. I found the same rationale for running two software packages in restaurants, diamond and jewelry firms, software companies, and even at my neighborhood video library and store.
While Quickbooks contributed $222 million, or 33%, of second-quarter fiscal 2005 revenue, it should bring in closer to 26%-27% of revenues for full fiscal 2005 after adjusting for third-quarter revenues, which are skewed toward TurboTax sales during tax season.
The huge number of ads on Monster.com, Craigslist, and other job sites for accountants with Quickbooks skills suggests that it has become a sort of default accounting package for small businesses -- which is pretty good for a fragmented market. In the accounting software market, Microsoft Excel competes as a solution!
Two interesting points came out in the second-quarter conference call. First, Quickbooks' premier versions clocked in a more impressive 24% increase, suggesting that Intuit's strategy of umbrella branding is paying off. The Quickbooks stable has three versions -- Basic, Pro, and Simple Start. There are also premier versions for the manufacturing, contracting, and not-for-profit sectors, plus complimentary products and services such as payroll and credit card processing. Second, direct sales increased a whopping 61% in that quarter. While direct sales are still a very minor contributor to revenues, they add crucial pennies to margins when revenue growth is tapering off.
Intuit is priced at about 20 times forward earnings of $1.90 per diluted share, slightly higher than management's estimated earnings growth rates of 17%-18% for fiscal 2005.
Intuit, a recommendation of our Motley Fool Inside Value newsletter service, has also not been mean in sharing its green with shareholders by buying back shares. It spent $610 million to do so in fiscal 2004 and has provided for $500 million in buybacks for fiscal 2005. Overall, the company has spent an estimated $1.7 billion since May 2001 for buybacks. And after all that generosity, it still had a nice pile of $875 million left in cash at the end of Q2 2005.