AGB 2023.2 - Intuit (INTU)
Powering Financial Software for Consumers and SMBs
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Intuit
Intuit is the leading financial management software provider for consumers and SMBs in the U.S. The company is best known for its TurboTax and QuickBooks product lines. In fiscal year 2022 (ends in July), TurboTax software was used by 47M filers in the US, which is roughly 29% of total tax returns filed. Within the do-it-yourself (DIY) market, TurboTax held 64% market share. QuickBooks is used by almost 7M online and desktop customers to manage the finances of their small to medium sized businesses (SMBs).
TurboTax is the main component of Intuit’s Consumer segment (31% of revenues and 36% of operating income). Customers use TurboTax software to file their taxes each year with the goal of easily achieving the highest refund (or the lowest payment). There are three basic levels of the software - Free, Deluxe and Premium. Usually owning a home, donating to charity, having investment income, and being self employed will push a filers towards the higher priced versions.
The four drivers for TurboTax growth are: (1) the number of total returns, (2) the % of those returns using DIY software, (3) TurboTax share of DIY, and (4) average price per return. Because TurboTax has high share in DIY (63% for TurboTax vs. 17% for H&R Block and 11% for TaxAct), the shift from assisted to DIY has benefited TurboTax over the past decade. TurboTax assisted 47M filers in the company’s fiscal year 2022, which was up from 31M in fiscal year 2012. Share gains have come at the expense of Tax Stores like H&R Block but that only accounts for 4M of the 16M in growth.
The CPA/Pro market has remained relatively consistent from 68M in 2012 to 72M in 2022. TurboTax is aiming to take share from the Tax Stores and CPA/Pros (87M total filers in 2022) through its TurboTax Live offering that was launched towards the end of 2020. Filers can connect to professionals to ask for advice on specific issues or opt for a full-service filing of their return. There are over 2k professionals on the offering.
There are two benefits that Intuit expects to achieve with growth of the TurboTax Live product. First, Intuit will aim to decrease the number of filers that start their return on TurboTax but ultimately file assisted by a professional. The company states that over 10M filers abandon the DIY method (4M attrition for TurboTax) and go to the assisted method every year.
Second, the company will aim to increase the average revenue per return. This is because TurboTax Live comes at a higher price. The industry average DIY revenue per return is $66 but assisted revenues are almost 4x that amount at $244. So even with the higher costs associated with running TurboTax Live from the payment to professionals, gross margins should remain near current levels. Exiting fiscal year 2022, TurboTax live contributed $1B in revenues and grew 30% y/y. This is already a quarter of the revenues of the consumer segment.
QuickBooks (Desktop + Online) make up most of the Small Business and Self-Employed segment (51% of revenues and 51% of operating income). Customers use QuickBooks to manage their businesses’ finances like bookkeeping, payroll, invoicing, etc. QuickBooks was more of a desktop product until 2013 when the company relaunched QuickBooks Online (QBO) with new features and an improved interface. Subsequently, the company launched QuickBooks Self-Employed, QuickBooks Capital (for customers looking for growth capital), QuickBooks Online Advanced (for mid-sized SMBs), QuickBooks Live (help from professionals) to continue Intuit’s growth trajectory.
Most of the growth in QuickBooks has been from QBO over the past 10 years. QBO subscribers increased between 500k-1M annually and there has only been a small amount of attrition from desktop subscribers. Because the QBO offering is a monthly subscription and the increased attach rates for other products, the life time value of a QBO subscriber was 40% higher than desktop in 2014. The attach rates and LTV should be higher now. The company doesn’t force desktop customers to switch, but has nudged new desktop subscribers towards annual subscription payments. As of fiscal year 2022, Intuit had almost 7M QuickBooks customers across online and desktop.
One of the recent growth avenues for QuickBooks is the new version targeting medium-sized businesses. QuickBooks Online Advanced (QBOA) targets SMBs with 10-100 employees. Intuit estimates that 10%-12% of QuickBooks customers reach this size each year, with half of them churning to other software. To reduce that churn, the company launched QBOA, which starts at $2k/year. This price point is much lower than software from Sage or NetSuite that can cost up to $25k/year. When the company launched QBOA in 2018, Intuit identified 180k QuickBooks customers (or 3.5% of total customer base) that fit the profile for QBOA. The company had 75k QBOA customers by 2020 and 118K by 2021, many of which came from outside of the QuickBooks platform.
QuickBooks Live, similar to TurboTax Live, allows customers to ask questions to professionals about their bookkeeping and accounting needs. The company launched QuickBooks Live with 600 professionals and the service costs between $500-$600/month. This offering should help retention rates and increase average revenue per customer (ARPC).
Intuit’s other two segments are Credit Karma (14% of revenues and 8% of operating income) and ProTax (4% and 6%). Credit Karma was Intuit’s largest acquisition at the time at $7.1B in 2020. Credit Karma offers free credit scores and helps customers with personal finance. The platform now has 129M members. Credit Karma is paid by banking institution when members sign up for new credit cards and other banking products. ProTax is Intuit’s financial software for professionals. Lacerte, ProSeries and ProConnect Tax Online all fall into this segment. Lacerte is used by accounting firms and ProSeries is for smaller accounting practices.
Intuit has put out long-term financial revenue growth targets of 8%-12% for the consumer segment and 10%-15% for the SMB segment. And within those two segments, the online portion is expected to grow 30%. The consumer segment will be driven by 0%-2% annual growth in total tax returns, 2%-4% from the shift to DIY (implies a 1%-2% gain in TurboTax share) and 4% growth in revenue per return. Within the SMB segment, the company is expecting growth to come from both number of paying customers and ARPC in the range of 10%-20% annually.