INTUIT RAMPS UP
FOR FURTHER GROWTH

Intuit provides business and financial management software and services for small businesses, accounting professionals and consumers. Products include small business accounting programme QuickBooks, tax preparation app TurboTax, money management app Quicken and email marketing platform Mailchimp.

Intuit has a long history of working with small businesses, and decades of investing in its proposition has enabled the company to deliver a valuable service to clients, for which it has been rewarded with healthy operating margins.

In our view, the company is well positioned to leverage its diverse set of offerings and artificial intelligence (AI) expertise to continue to gain market share in all the segments it serves, while also driving average revenue per user (ARPU) gains across its portfolio, especially as it builds on its ‘live’ platform within the consumer and small business segments. We see additional ARPU gains coming from the ongoing enhancement of existing products (for example, the move to full-service payroll) as well as future innovations.

RUNWAY FOR GROWTH

Management’s new strategy, which is focused on higher-value solutions, shifts the growth equation more towards growth in revenue per customer from the customer base growth that has driven strong growth historically. While the long-term growth profile is unchanged by this new formula, we believe the focus on higher-value solutions (on top of new monetisation avenues and a recovering macro environment) should allow for durable revenue growth, faster margin expansion and accelerated earnings growth.

The runway for growth in Intuit’s core market is clear to see considering an estimated turnover of only US$16 billion by July 2024. There is considerable scope to build out its services across both verticals and within the existing client base by focusing on increasing ARPU through price increases, added services (Credit Karma in particular on the payment side) and cross-selling within the business.

Around half of Intuit’s clients have a revenue profile below US$10 million and over 80% have a revenue turnover of less than US$100 million. In our view, a focus on small and medium-sized enterprises (SMEs) is a long-term opportunity for the company, as this is typically the fastest-growing segment of the economy. It is also a highly fragmented market, which affords a business like Intuit the opportunity to offer potential clients a one-stop service with better economies of scale than weaker competitors.

According to the Office of the United States Trade Representative, the US has 30 million SMEs, a figure that is growing at roughly 3% per annum. The vast majority of these fall into the microbusiness category – enterprises with fewer than 10 employees. Intuit’s QuickBooks Online (a cloud-native product) customer profile is weighted towards the small-revenue customer. The product currently enjoys roughly 50% of the micro and small-market share in the US, while its nearest competitor, Xero, has a 3.5% market share.

INDUSTRY TRENDS

Additionally, there are industry trends within the SME segment specifically that favour an even better spending trajectory than that of the overall enterprise software market, particularly with regard to the rate of adoption of cloud services. The penetration of technology adoption within the small and medium business segment is far below that of larger enterprises, with SMEs still relying heavily on manual and spreadsheet methods of bookkeeping and accounting.

This sparse adoption of technology solutions drives inefficiencies for SMEs relative to their larger counterparts, including time-consuming manual account recording, few or no financial data insights, a higher risk of error and inefficient tax filing processes. This creates an opportunity for businesses such as Intuit to bring these customers onto accounting, human resources and payroll software solutions.

SOLID HISTORY OF RETURNS

Intuit’s important small business unit, which includes QuickBooks and Mailchimp, grew by more than 18% year on year over the last quarter, while online services and the total international online ecosystem grew by 21% year on year. Payment volume growth showed a 20% increase year on year. Intuit left its financial guidance unchanged, which includes revenue growth of 11-12% to ~US$16 billion for the year ending July 2024. With the company already performing well since we first invested in May 2022, the share is in our view now fully valued. Given Intuit’s solid history of delivering consistent returns, we recommend that investors hold on to this strong, long-term compounder.