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Intuit's small-business push pays off

Why is financial software and services company Intuit setting its sights on small business? "Because that's where the money is," a company executive says.

Why is financial software and services company Intuit setting its sights on small business?

The same reason Willie Sutton gave for robbing banks, said Raymond Stern, senior vice president of corporate development and strategy: "Because that's where the money is."

Intuit, best known to consumers for its Quicken personal finance software and TurboTax tax preparation products, announced a major shift in corporate strategy last year with its "Right for My Business" campaign. Building on its QuickBooks software, well established as the leading accounting package for businesses with 20 or fewer employees, Intuit aimed to become the main provider of finance-related software and services to a full spectrum of small businesses, handling everything from payroll to tax filing.

The strategy appears to be paying off. Intuit earlier this week reported third-quarter earnings that were up significantly from a year ago and ahead of analyst expectations.

Besides a seasonal climb in sales of TurboTax products, the company credited solid growth in QuickBooks and other small-business areas. Revenue from QuickBooks-related products totaled $63.5 million, up more than a third from the same period a year ago. The two main forms of QuickBooks-branded payroll-processing services had 100,000 more customers than a year ago, for a 38 percent increase in revenue.

The shift comes as revenue from other areas, particularly the Quicken personal finance products, is shrinking. Quicken now accounts for just 8 percent of Intuit's revenue, even though the company's market stance has held steady in the 70 percent range. The application's main competition is Microsoft's Money software.

"We're just seeing the maturation of the market," Stern said. "It's a category that's shrinking, and we've been preparing for that for years."

"The reason were focused on the small-business space is because it's a massive opportunity that just dwarfs any opportunity we're focused on in the consumer space," Stern added. "These businesses have demonstrated a willingness to pay for products and services that help them run their business better. We're showing them how we can do that."

Stock price from January 1, 2002 to present.  
Source: Prophet Finance
Jamie Punishill, a financial services analyst for Forrester Research, said Intuit is focusing on two targets with significant potential for near- and long-term growth: small businesses and tax preparation.

On the tax end, sales of boxed TurboTax showed modest growth this year, but the real story was the online TurboTax service, where paid users jumped 85 percent at 2.2 million. The shift to online taxes is important, Punishill said, not only because it eliminates problems with customers illegally using a single copy of the boxed software to file more than one return but also because it offers a much lower cost structure now that Intuit has built out its online infrastructure.

"It's a heavy, upfront hard cost but with very little variable cost," he said. "The more they grow there, it all goes to the bottom line."

Stern added that Intuit has been able to grow the online TurboTax audience without much cannibalization of boxed software customers.

"The Web version is really helping us grow the business," he said. "It's bringing in a lot of people who have never used desktop software to do their taxes."

Slicing up the small-business pie
On the small-business side, Intuit's strategy began with broadening its definition of small business. The company originally sold a single version of QuickBooks that worked for businesses with 20 or fewer employees. Last year, Intuit raised it sights with QuickBooks Enterprise, a beefier version capable of handling up to 250 employees. Intuit estimates the change increases the potential QuickBooks market by $18 billion a year.

Now Intuit is hoping to get QuickBooks customers to upgrade by offering versions targeted at specific business segments. The company earlier this year released QuickBooks Point of Sale, a version of the accounting software tailored for retail businesses. It expects to offer up to a dozen more specialty versions of the software within the next few years.

J.P. Morgan analyst Adam Holt said there's still a lot of potential in selling products tailored for specific business segments, as the main competition for QuickBooks is smaller companies that make software and have only niche products. By coming up with its own approach and selectively acquiring companies such as American Fundware, a specialist in accounting software for nonprofits that Intuit agreed to acquire earlier this month, Intuit can offer customers the best of both worlds.

"It's a highly fragmented marketplace," Holt said. "You've got a lot of little solutions-providers targeted at individual vertical markets, but there isn't anybody with Intuit's brand name, balance sheet and installed base that's rolling out vertical products. I think they're really well-positioned to succeed there."

Intuit is also working to use the strength of QuickBooks to sell other services, such as payroll processing. Intuit has posted substantial growth in the past year for its QuickBooks payroll services and recently announced the acquisition of payroll specialist CBS Employer Services.

Holt said payroll services are on track to become a substantial part of Intuit's business. "Historically, the company has done a pretty good job of cross-selling services like payroll and financial supplies," he said. "We expect payroll services to generate on the order of $150 million in revenue (this year). I think they've just begun to crack the surface there."

Analysts had expected QuickBooks to find fresh competition from Microsoft and its recently acquired Great Plains accounting software subsidiary, but to date, Great Plains has had little success in pitching to small business, Punishill said, partly because of the complexity of Great Plains software.

"The real strength of QuickBooks for a long time has been usability," he said. "Whether Microsoft can dumb down the Great Plains product really remains to be seen. Besides, this is Intuit's business; this is what they do. If the Great Plains acquisition doesn't work for Microsoft, it barely shows up on their balance sheet."