Intuit

Who would turn down help with their tax return?

Tax season is coming up again soon, which means gathering up all your documents, invoices and receipts and filing your tax return on time. Even if, as an employee, you usually aren't required to file an income tax return, it can still be very worthwhile in most cases. On average, those who filed a return get €1,027 back. And even though it takes a bit of effort, you definitely shouldn't miss out on that.
In America, there's a clear market leader that specializes in financial software solutions for individuals, small businesses and also accounting service providers. I'm talking about Intuit Inc., which has proven several times in its company history that it can adapt and hold its own against bigger players - but more on that in today's article.

The origins and business model of Intuit Inc.

The story of Intuit Inc. begins on July 26, 1952, when Scott David Cook was born in a suburb of Los Angeles. Even as a teenager, Scott was very interested in the new computers and the possibilities that came with them. Without further ado, he taught himself how to program. Somewhat later, he attended the University of Southern California, where he earned his degree in economics and mathematics. Right after that, he completed his MBA at Harvard Business School. For his career, he moved to Cincinnati to work in brand management at Procter & Gamble, where he also met his future wife Signe Ostby. Because of the more pleasant climate, he moved to San Francisco with his wife in 1980, where he quickly found a job at the consulting firm Bain & Co.. One evening, as the two sat at the kitchen table working through their household finances, Scott had a brainstorm - he wanted to develop software that would make it easy to manage finances and automate tedious paperwork.
Without hesitating long, Scott decided to develop his idea further and looked for a programmer at Stanford University. While looking for a bulletin board to put up his ad, he ran into the student Thomas Proulx, who was walking by, and asked him for help. In the conversation, it turned out that he was already working as a programmer and was willing to help Scott. In his small dorm room, Thomas wrote the first version of Quicken, a simple program for managing personal finances. Scott was thrilled; he still had a few small suggestions for improvement here and there, but he knew the program would be a huge success. So in 1983, together with Thomas, he founded Intuit Inc. - named for its operation being as intuitive as possible.
While Thomas tinkered with more features, Scott used his marketing experience and had many conversations with existing and potential customers to find out about their needs and wishes. This helped them improve their software, but sales turned out to be much more complicated than expected. They couldn't find a single retailer willing to stock the still-unknown program in their store. When Scott was no longer able to pay salaries, three of the original seven employees left the young company. The remaining four believed in the product and kept working without pay for more than half a year. At that point, Scott himself was over 300,000 dollars in debt. When their software got a positive mention in a trade magazine in 1986, sales gradually picked up. In the end, they put their last money into an expensive advertising campaign and were able to successfully revive Intuit with it. In the following years, Quicken became one of the best-selling financial software solutions in the country. The profits were immediately invested in developing new programs that could now also be used to prepare tax returns for individuals and small businesses. After a failed merger attempt with software giant Microsoft, the company ultimately had to hold its own against Microsoft Money. Sales began to weaken, and Intuit had to reinvent itself as an internet company in no time at all. Today Intuit operates the tax preparation software TurboTax, the finance app Mint, the accounting program QuickBooks for small businesses, as well as the professional application ProConnect, and is increasingly working with artificial intelligence and cloud-based solutions to serve its customers as well as possible.

How could Intuit develop in the future?

Before I turn to the opportunities and risks of the software company, I'd like to take a look at the numbers for the most recently reported quarter (Q1 2021 - ended October 31, 2020). In this quarter, Intuit managed to grow revenue by an impressive 14 percent over the prior-year quarter to 1.32 billion US dollars. Thanks to lower expenses, earnings per share also rose significantly: from 0.41 USD in Q1 2020 to 0.94 USD now - an incredible increase of 129 percent! No wonder the stock went through the roof. I'm already very excited about the next quarterly numbers, which will be released in the coming days.

Below, I'd like to go into some interesting opportunities for Intuit Inc. For one thing, it's worth mentioning that as long as there are countries, there will be tax rules, and these will certainly be adjusted and changed regularly too. It's also a fact that we humans are lazy and most of us probably don't enjoy reading up on tax matters all over again every year. And software programs into which you've entered your data once, you'll very likely use again - why go to the trouble of entering all your data from scratch? And now please imagine you didn't just have to transfer your own data, but also that of all your hundreds of employees. For Intuit, which switched from fixed prices to subscription pricing a few years ago, this means it actually has a kind of convenience moat. The accounting software QuickBooks is used mostly by many smaller businesses, as it ensures efficient and smart financial management. If a customer drops off here, it doesn't hurt Intuit as much as it would if it served only a few large customers.

Intuit generates most of its revenue in its home country, America. There's still enough growth potential there for the coming years/decades, but the company is increasingly starting to expand abroad. Of course, the software solutions have to be adapted to the tax laws in force in each country, but that effort should be manageable. Intuit currently has 10,000+ employees spread across 20 offices in 9 countries.

As a risk, it's worth mentioning that Intuit doesn't have weak competition. For example, Automatic Data Processing is also active in the financial services market, although it focuses more on larger companies and takes the work off their hands completely, whereas Intuit only provides the software. Furthermore, there's of course the risk that governments suddenly make taxes totally simple, making software offerings obsolete. However, I can't really imagine that today ...

What's the story with the dividend?

Well, as is often the case with tech companies, Intuit didn't pay a dividend for a long time either. Only in 2011 did the software forge start letting its shareholders share in the company's profits. Since then, it has also managed to raise the dividend year after year, and at a solid pace. Since looking at the last 10 years doesn't really make sense here, let's look at the last 5 years - over that period, the dividend was raised by an average of 15.8 percent. With a figure like that, you can also accept the low dividend yield of 0.5 percent. There's still plenty of room to grow, and the payout ratio is also quite low at currently 30.1 percent.

Conclusion

The software forge Intuit has managed to work its way from a college dorm to the top of the financial software industry. It has a strong product portfolio and certainly won't shy away from breaking new ground in the future either, in order to offer its customers the best possible product. Personally, I'm putting the stock on my watchlist and will buy on a pullback.