Intuit: Acquisition Of Demandforce Is Useful But Expensive Addition

Apr.30.12 | About: Intuit Inc. (INTU)

Intuit (NASDAQ:INTU) agreed to purchase Demandforce in an all cash transaction valuing the cloud based software company incorporated in San Francisco at $423 million.

The Deal

Intuit, the provider of business and financial management solutions for small- and medium sized businesses and consumers agrees to purchase Demandforce for $423 million. The all cash deal which is subject to regulatory approval is expected to close in May 2012. The acquisition is expected to add between one or two points to Intuit's revenue growth for the fiscal year of 2013 and is neutral to slightly dilutive for earnings per share.

Demandforce

San Francisco based Demandforce generated $37.5 million in sales last year. The company which was founded as recent as 2003 employs 300 employees who will move over to Intuit. The company's services allows small businesses to improve their communication with customers by scheduling online appointments. The monthly subscription rates of $200-$300 are far above the rates of Intuit's own services. Intuit hopes to successfully increase cross-selling between its own services and those of Demandforce in an attempt to boost growth and margins.

Acquisition Based strategy

Under the lead of CEO Brad Smith Intuit has been acquiring companies in order to expand into the mobile payments and health care industry. Known from its tax-preparation software including Quicken and TurboTax, Intuit previously acquired mobile based AisleBuyer LLC for an unknown amount. The company's strategy is based on a convergence of tax preparation and payroll software converging in an online and mobile environment.

Valuation

Intuit ended its fiscal year 2011 with $959 million in cash and equivalents and operates with $999 million in short and long term debt for a small debt position of $40 million. Shares of Intuit trade at an annual revenue mulitple of 4.4 times and 27 times 2011's annual earnings, based on a current valuation of $17 billion. This compares to revenue multiples of 5.4 times for Paychex (NASDAQ:PAYX) and 2.8 times for Automated Data Processing (NASDAQ:ADP).

Currently the company pays a quarterly dividend of $0.15 for an annual dividend yield of 1.0%

Investment Thesis

Shares of Intuit trade just shy of all time highs of $62 per share set earlier this month, but have fallen some 6% ever since. Despite the little setback shares have returned over 150% in merely three years as the company has shown accelerating revenue growth accompanied with margins peaking at 16.5%

The addition of Demandforce which is rather expensive does increase the overall growth profile of Intuit and fits within the strategy of convergence of payroll and tax software and more mobile based strategies. Despite strong revenue growth and high margins I am not a buyer as the valuation already reflects these positive developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.