I've followed Intuit for some years now, hoping to learn how a so-called 'legacy' vendor shifts both its products and business model to reflect the trend towards cloud computing. The company's latest quarterly check in (PDF) provides some interesting data against which to both gut check the changes Intuit is making and to evaluate how SMBs, and especially those in the US, are behaving.
Make no mistake, Intuit is the REALLY big dog in the US SMB accounting and tax room. No other vendor comes remotely close. Until recently I had thought that despite their stranglehold over the market, Intuit was vulnerable to attack from the newer kids on the block. I am no longer so sure. There are a number of factors leading me to that conclusion.
Despite downward price pressure, Intuit has an extraordinarily profitable line of tax related products that kick in at this time of the year. So far this fiscal year, Intuit reports having filed 34 million tax returns in the US. That's 10% up on the whole of 2015 and before we see the slight bump that comes from late filers in Q4. Of that total, a full 27.6 million were filed online, which fits neatly with the Fed's push to getting everyone they can filing online.
At the same time, Intuit has done a very good job of getting more customers to use its QBO online product. That line grew a tad under 30% by volume year over year to 1.397 million users. However, total ARR only grew 19.7% to $685 pa/pu. That may seem worrying but from what I can tell, Intuit has barely had to discount any of its QBO revenue while continuing to grow the numbers. Turning to the desktop market, Intuit reports year over year growth of 22.9% although subscriptions are relatively flat. Add in the captive tax market (which includes a free to use option) and you can readily see how the company has developed a resilient business model.
This is what Brad Smith, CEO had to say about the position on a call with financial analysts:
First of all, we would tell you the important thing to think about is that desktop and online are not a zero sum game. In fact, what we are doing is we are expanding the total addressable market...
...We have a group of customers that even with feature parity and even with pricing concessions do not want to move to the cloud right now either because their accountant isn’t yet in the cloud or the Small Business just likes the product the way they have it and they don’t want to make the move. We want to make sure they remain active customers of Intuit and that they are buying payroll and payment services, so we want to keep them delighted. So, we are making sure that the desktop customers are happy. The cloud customers are happy. And that those who want to move over, we want to make it easy for them to do that. So net-net, we have a very vibrant ecosystem right now. It’s growing in total. And the online subs for us, actually was right on our expectations.
[My emphasis added]
That is interesting and gels with what I hear time and again from colleagues. QuickBooks is not only convenient, it meets SMB needs in an easy to use manner. If there is no pressing need to go to the cloud then why would you? On the flip side, I can attest to QBOs utility as I test drove (and paid for) it last year for my personal use. I was pleasantly surprised at how easy it was to use on any device and how well it integrated to my bank providers along with expense auto allocation. It was also very well priced for my needs. Can QBO manage complexity and is it a business system in the terms I understand? Not really but it does provide a clear view of where you stand at any point in time. I can therefore understand why it is the nation's favorite, even though the retention rate is currently pegged at 80%, reflecting competition from elsewhere but a significant improvement on 2015 when it was running in the 70's.
Again and in conversation with colleagues, tax filing is a nightmare in the US. Go it alone and you'll almost certainly end up in trouble. But Intuit seems to be making it a heck of a lot easier for most people. Again, this is what Smith had to say:
What’s happening right now was we are really making big advances towards taxes completely going away and having no friction for customers to get to the refund. And you heard me talk about this year on average customer spent 40% less time having to do their taxes. That is not stuff that competition can match. Now at the same time, I will tell you we have a lot of respect for our competition. We don’t underestimate them when we know every year is going to be competitive. But do I believe that the same can continue to advance our product innovation and as a result, continue to win more customers and take share? I do.
That's the voice of confidence.
What of the future? Intuit is sticking with its short and longer term guidance, which suggests a measure of caution to me. I'm not sure I understand why and despite repeated questions on this topic, we didn't learn anything substantially new. The product is certainly good enough, it has plenty of partners and, crucially, it counts some 600,000 customers that are influenced by accountants. I say crucially because despite the reticence of US professional accountants to make overt or specific recommendations, small business owners are not so different in the US to elsewhere and will take the advice of a trusted advisor. Nevertheless, the numbers they are forecasting are impressive with a reiteration of 2.2 million QBO users by the end of fiscal 2017.
Are there any downsides? The company acknowledged some issues it had in Canada, India and Brazil. To be frank, the reasons given were the sort of thing I would not expect from an established vendor. Country specific localizations missing for India for example? Channel issues in Canada. Reading between the lines, it appears that any problems Intuit experienced are largely behind them. They claim to be doing very well in Australia and the UK with QBO but from my perch those numbers must be very small because we almost never hear about them as a significant competitor in either market. The last I heard from Australia was 33,000 customers and that was September 2015. I've not seen any recent figures for the UK but again, they don't turn up in competitive comparisons despite a raft of pricing flip flops and offers of every stripe.
The bigger issue for me is one of appetite for overseas expansion. This is a common issue among US vendors who almost never understand what they're doing outside their own territory, and frequently have a number of mis-steps along the way before finding their feet. (By the way - this goes the other way too and then some!) I wonder whether Intuit feels obliged to enter these territories in order to keep its Wall Street backers happy but is doing so reluctantly while at the same time pining to capture more of the potential 30 million people in its home market. That's speculation on my part of course but then...
What about that competition? The obvious name that springs to mind is Xero which has done a very good job of ensuring it is on every media radar. Paul Wallbank recently dissected their numbers. While Xero has grown very well in the US the last year, the numbers are still relatively small, and must be costing them a fortune to acquire. In the meantime, Xero has a nice all-in-one tax, payroll and accounting package for small business in the US that it is promoting like crazy and which stands as a healthy competitor to Intuit. My thinking? Watch this space.
In the meantime, I will be checking in at the final quarter to see what, if anything, has changed.