Intuit's post-tax-season hibernation

A brief post-April drop in share price is traditional for the financial software publisher. With one exception, the stock has seen a sharp downward spike each May since going public more than eight years ago.

It's as constant as death and taxes, which should shock no one; investors practically forget Intuit exists after the U.S. tax season's climax in April. Intuit's July and October quarters are the company's weakest periods.

Yet everyone on Wall Street seems to be caught by surprise. They might want to try looking a little further down the road.

This year, the requisite plunge happened late last week. But the shares have fallen 10 percent since Prudential Securities analyst Bryan Keane on Thursday downgraded Intuit to "hold" from a "strong buy" rating. His reasoning is succinct: There's nothing to lift the stock.

"We foresee few catalysts for (Intuit shares) to trade up from current trading levels as (the company) reaches its seasonally slow period," he wrote. "As we review Intuit's many business initiatives, we could not avoid the simple fact that many of them are struggling."

That includes, in Keane's view, two of Intuit's core businesses: Quicken personal-finance products and QuickBooks small-business accounting software. TurboTax products, the third leg of Intuit's core triangle, is merely "on par" with expectations, Keane wrote.

What's in store
Intuit executives will get their chance to speak to the doubters Tuesday afternoon when the company reports its third-quarter results. Executives said they expected a strong tax season, but the part everyone awaits is a forecast for the next few quarters.

Many Wall Street analysts expect Intuit to ratchet down revenue targets from March, given not only the slowdown in the PC market but also slower sales growth in the QuickBooks franchise.

According to First Call, Intuit is expected to report a third-quarter profit of 53 cents a share on revenue of $435 million.

"There are a lot of questions as to what the company's going to provide for revenue guidance," said Tim Butler, analyst with Pacific Crest Securities. "There's some skepticism on the Street as to the credibility of management's earlier guidance."

Sales growth for Quicken and QuickBooks certainly hasn't kept the pace from last year. Keane sees only 5 percent annual unit growth for QuickBooks in fiscal 2001, whereas QuickBooks' user base grew more than 20 percent in the previous year. And the company's online initiatives suffer from the same issues plaguing all Web companies these days, including the advertising slowdown and the failure of business-to-business commerce to catch on.

Yet relative to other technology companies, is Intuit doing that badly?

"I think the concerns about revenue growth for the company are certainly valid," said Craig Peckham, an analyst with Jefferies. "But the question people have to ask is, 'Is revenue growth more important than profit growth?'"

Although Intuit cut revenue forecasts in March, the company has stood by its original goals of boosting operating profit by more than 30 percent in fiscal 2001, which ends in July. Intuit CEO Steve Bennett has repeatedly emphasized profit growth since his appointment in January of last year.

Peckham noted that Intuit has consistently boosted earnings more than 20 percent in the past several years, and it expects to top 30 percent this year in the midst of a tech industry recession. "That performance points to the resiliency of Intuit's business model," Peckham said.

Same story, different year
The current crop of concerns is a replay of the same question asked about Intuit every post-tax season for the past five years: Is Intuit nothing more than a two-note company? Is Intuit nothing more than two or three applications for accounting and tax filing?

"There's an implicit expectation on the Street that Intuit will diversify itself," Butler said.

Ever since the failure of the company's attempted sale to Microsoft in 1996, Intuit has been trying to change its image as merely a maker of finance software. The Internet was originally supposed to be the catalyst for a newer, broader Intuit, but with the collapse of the dot-com industry, the focus has shifted to other business services, including payroll processing and Quicken Loans.

To keep Intuit zeroed in on finance and closely related services, Bennett has dumped divisions such as the online bill-presentation business, which was sold last week.

To Intuit's credit, the company's new businesses are doing well. Analysts generally like the rapid growth seen in the Payroll and Quicken Loans divisions so far, and there's no reason why it shouldn't continue, because Intuit is targeting very small businesses--those with fewer than 100 employees.

It's the kind of market that larger payroll processors such as Paychex and ADT have dismissed, but Intuit can easily hit it through an installed base of QuickBooks and Quicken users.

"Intuit has already acquired the customer," Peckham notes.

That's a business that will take years to develop, of course. For the foreseeable future, Intuit will still get its profits from the Christmas and tax seasons. It will be a streaky flow of revenue, but also a solid one.