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Intuit (NASDAQ:INTU), one of small business' best friends, performed well across all its segments in fiscal 2011 (July)

2011

Segment

Revenue

$ Mn

Rev Growth

%

Op Profit

$ Mn

OPM %

Op Profit

Growth %

Fin Management-QuickBooks

701

14.7

220

31.4

44.7

Emp Management - Payroll

457

9.3

271

59.3

7.1

Payment Sol - CC Processing

348

11.2

64

18.4

(4.5)

Consumer Tax-Turbo Tax

1,298

13.3

850

65.5

13.9

Accounting Pros-QBEnterprise

399

7.0

228

57.1

8.6

Financial Services -Outsourcing

346

4.2

83

24.0

16.9

Other -Quicken and non U.S.

302

15.3

67

22.2

4.7

Total

3,851

11.5

1,783

46.3

14.1

With fixed costs under control, revenue growth of 11.5% translated into operating profits jumping 14% and net income increasing 18% to $ 634 Mn.

Best known for TurboTax and QuickBooks (market leaders by wide margins in their respective markets), Intuit is well positioned to take advantage of the migration of small business onto cloud and online services. It should grow earnings about 17% each year over the next three years on these growth factors…

Cross selling - Intuit's main products, QuickBooks, TurboTax, Intuit Payroll, PayCycle, and credit card processing are integrated with each other and provide great opportunities to cross sell to the same customer at a lower cost.

Online Focus

Key to Intuit's growth is their online and cloud focus. Their fastest grower in 2011 was QuickBooks Online, which grew 35% from a small base of 350,000 users, a fraction of 4 Mn QuickBooks users. Quick books online also brought in a larger number of new customers to Intuit in 2011 - a non traditional source of newer generation, small businesses attracted to the mobility and flexibility of online accounting. Besides QB online, Intuit also saw better growth of 22% at PayCycle (Online Payroll) a company it bought a few years back to complement its payroll service offering, usually sold through QuickBooks as a Payroll module. Intuit is a small player in this segment compared to ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX), but the online focus is a step in the right direction. Intuit also wide acceptance for Snap Tax Mobile and Turbo Tax for the IPAD this year.

Recurring Revenue Streams

Unlike desktop versions of QuickBooks - QuickBooks online users are charged a monthly fee. Intuit estimates that it makes 20% more this way over the lifetime of the product.

Similarly, Intuit's Credit Card Processing service also earns monthly subscription and transaction charges. GoPayment, its mobile payment platform drove growth in this segment.

Growing abroad

Intuit grew its other segment business by 15% mainly due to forays into Canada, U.K, Singapore and India.

Challenges

The QuickBooks Online version is very weak compared to the desktop one and unless there is substantial improvement on this front I don't see enough businesses transitiong online.

I agree with Robert Broen's assessment that Intuit's purchase of Demandforce was expensive. My take is that the average business user of QuickBooks would not spend $200 to $300 a month extra on customer communication. I think Intuit should focus well within its domains of accounting, payroll, taxes and business processing. Distractions could be expensive and a waste of capital.

Valuation

Consensus estimates call for earnings of $2.59 for July 12, $ 2.96 for July 13 and $ 3.34 for July 14. I'm slightly more bullish and expect $ 3.05 and $ 3.50 in July 13 and July 14. With a forward (July 12) PE of 22, Intuit is a tad on the expensive side. However, given its market leadership, huge cash generation from its flagship, TurboTax and the regularity with which it has been introducing new products in line with market trends, I would invest for the long term and buy in increments between $55 and $60.

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

Source: Intuit: Firing On All Cylinders