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Intuit's "big picture" guy

Intuit Senior Vice President Raymond Stern helps set his company's corporate agenda. So far, Intuit has bested Microsoft so that it's not even close. He must be doing something right.

When Intuit executives like Raymond Stern talk about their company's future, the discussion inevitably revolves around the extremes of the enterprise spectrum: businesses with fewer than 100 people and the government--or, specifically, paying the government.

Intuit remains one of the best-known examples of a company that defeated Microsoft. The company's Quicken software for personal finance was so successful that Microsoft would have jettisoned its own Money product to buy Intuit outright years ago if not for opposition from the U.S. Department of Justice.

Today, Intuit's competition isn't so much Microsoft as the likes of H&R. Block. With the personal-finance software market saturated, tax products and small-business software have become Intuit's main source of growth.

Tax applications, including payroll services, are the single largest source of Intuit's overall revenue, which totaled $1.26 billion in fiscal 2001, according to the company's year-end report released last week. Intuit doesn't expect that to change, regardless of how the economy performs, because taxes never go away; they only get more complex each year.

Stern always keeps that kind of big picture in mind because he has a big-picture job. He spent more than 10 years as a technology consultant before joining Intuit in 1998. His job: senior vice president, corporate development and strategy.

"Mr. Stern plays a key role in setting and achieving the company's future goals and has responsibility for all aspects of strategic development and planning," says the company's Web site.

Or in other words: He's in charge of Intuit's merger and acquisition plans.

The post requires him to know a lot about Intuit's long-range plans, so he seemed to be as good a person as any to talk about Intuit's direction. Stern spoke with us in an interview last week, shortly after Intuit reported fiscal fourth-quarter results.

Q: Intuit believes tax will be a growth driver for years to come. I know you have TurboTax and the payroll products, but what other things are you looking at to expand tax-related revenue? Every year the tax codes are changing, and so people need to get the new tax software to prepare taxes.
A: If you look at our tax-related businesses, it not only includes TurboTax, which is the consumer tax offering that we have, it also includes the ProTax business that we have, where we have our Pro series on the third product. So those two businesses for the year were about $180 million of revenue for the company and highly profitable.

We also have the payroll business, which is significantly driven by taxes because a lot of that business is about the tax filings and calculations. We have a business in selling tax forms to small businesses who are preparing their taxes.

So all in all, taxes are big business for Intuit. And that's what we're so excited about, because not only is it big, it's also growing rapidly. They're extremely profitable businesses for us. They're recurring by nature, in that every year the tax codes are changing, and so people need to get the new tax software to prepare taxes or continue to sign up for the payroll service to get the new tax filings and get the tax calculations done for them.

And it's also mandatory. I mean, you've got to file your taxes. So all in all, we like it. It's big, it's profitable. About half of our revenues this year came from tax-related activities, and that's essentially adding up the revenues of the things I mentioned before. And in aggregate, those revenues grew 25 percent from the prior year.

Certainly taxes are a big market, and obviously they're recurring. Somewhat similar arguments were made by makers of things like enterprise resource planning (ERP) software (companies need to improve productivity in good times or bad times, and so on), and yet, it didn't necessarily translate into companies dipping into their IT budgets to buy new ERP applications during the economic slowdown.
I think the difference with ERP is it really is discretionary. An enterprise can choose to delay an investment in a new Oracle system. It's not going to change their ability to calculate and do their financials, whereas if I don't buy the new tax software product--if I'm preparing my taxes as a consumer--I can't use last year's product. It will not work.

So I agree with the premise that companies will continue to invest to improve productivity, but they don't have to invest in the new (ERP) product each year.

I suppose they could file taxes the old-fashioned way...
Try pencil and paper. But I think that's where we get to the huge value that we bring to our customer, at a relatively small dollar amount. Even for a professional tax preparer who's buying a high-end product, it's two and a half, three thousand dollars, and it's a tool that is their livelihood. They're preparing taxes for hundreds and hundreds of consumers and making their business based on that tool.

That's a couple or three grand to drive your own personal $100,000+ CPA or tax-preparation business; it's pretty compelling. If you had to do all those by hand and manually calculate, you'd probably do one-tenth as many customers just from a pure efficiency standpoint, and it would significantly impact your business if you were a professional tax preparer.

Why wouldn't the tax software business, as large as it is, if you keep growing at a rapid rate, become as saturated as quickly as the personal-finance software business did? Your growth in personal finance slowed after less than a decade.
I think clearly, over time, (the tax software business) will get saturated. I think the wonderful thing about the business is there's still a lot of room for growth.

If you take consumer tax as an example, we did a total of 7.6 million units that we sold, and there are 80 million-plus households that need to prepare their taxes. Even if you add up competitors' offerings--which are significantly smaller, because we ended up with 82 percent share at retail of the consumer tax business--and take into account those who use professional advisers, something on the order of 35 million people are still doing their taxes using paper and pencil.

And we see a lot of room for growth. And you can continue to grow at double-digit growth rates for many, many years, particularly as we continue to add features and functionality to the product that make it more compelling to new classes of customers.

Let's shift to one of your other high-profile product lines. QuickBooks revenue growth slowed this year as the economy went down the tubes, and because a lot of businesses bought the product the year before with year 2000 upgrades. What more could be done to jump-start that business?
QuickBooks didn't grow as fast as we would have liked, but we added 427,000 customers to that base (in fiscal 2001). More of (the growth slowdown), frankly, was driven by the Y2K issue.

But looking to the future, there's still growth in the QuickBooks business. There's always new business formation. There are a number of small businesses, a lot, that still do it the old-fashioned way, with spreadsheets and pencil and paper. About half of our revenues this year came from tax-related activities.

So we see opportunity for growth. But importantly, our strategy that we've described for small business allows selling additional services to small business. So payrolls, for example--we're getting them on a support plan. Our opportunity is to go to the existing base we already have of 3 million users, where we have barely scratched the surface in terms of penetrating the sales of these (other) products.

So while we clearly want to continue to grow the base of QuickBooks users and believe there's opportunity, I'm a lot happier if I sell one payroll customer who's generating $1,000-plus a year than one copy of QuickBooks. And we see large opportunity to go to that base of 3 million customers and sell them on more profitable and larger revenue services that we've launched already and will be over time introducing new services.

Upgrade cycles for software in general seem to have slowed. How does Intuit resist that trend? Other than selling new versions of tax software every year.
I think the key is to add value to the product, to add the thing that makes it compelling for a user or a small business who, at the end of the day, wants to run their business, not do their accounting. And if you can add that set of features or key pieces of functionality, that liberates them and gives them more time to focus on what they want to do. They'll be willing to pay two, three hundred dollars, or less if you're upgrading, for the latest version of the product.

But isn't there a limit to that? Microsoft talks about adding functionality with every new version of Office, yet Office upgrades seem to be slowing.
At some point, there probably is diminishing returns. We haven't seen it yet.

We added some really neat functionality this year with the ability to do payments within QuickBooks and send and receive payments. The example is Merchant Account Services, where you can take credit card payments from your customers--you can e-mail invoices to people--and those are things that are pretty compelling to small businesses.

And I think as long as we continue to focus on the needs of small businesses, with the years of experience and rigor that we put around that, we'll be able to continue to find those things that meet their specific needs and add value to what they're trying to do, through the products that we deliver to them.

It was pretty clear on the quarterly earnings conference call that Intuit continues to be a big believer in the desktop, although many software vendors are talking a lot about Microsoft.Net and things like that. Why does the desktop continue to remain valuable, and how long will it stay that way?
I think we're a big believer in the desktop, but we're also a big, big believer in choice, and letting consumers--or small businesses, in the case you were asking about before--choose how they want to get the functionality that they're looking for.

And our point of view is that in certain businesses, certain aspects of our business, the time dimension of that is different. We talked about the tax business before, and we had 2.4 million consumers do their taxes over the Web on a pure Web solution, which is significant.

In the small-business arena, what we've discovered is that small businesses really do like what the desktop offers to them. It is still an order of magnitude better in terms of performance, just because of speed when it's on a local desktop, even compared to a high-bandwidth line.

There's issues for small (businesses). One is that small businesses should get more compelling offerings, and if you look at the feature set of QuickBooks today, it's still much more advanced than any ASP (application service provider) offering out there. I think secondly, small businesses are a little more conservative; they're a little bit more concerned about things like privacy and security.

Despite the fact that we think our brand and our reputation as Intuit stands for a lot in the consumer's mind, and they'll be willing and have proven themselves, willing to trust us with their most sensitive of data--witness the example on the tax side--small businesses are more conservative, and they'll take a little bit longer. They're more comfortable doing things on the desktop than on the Web.

So how valid for Intuit is the idea of the subscription model for software or software as a service?
It is very valid, and again, I'll give you the example, where in the TurboTax arena you come up every year, you pay us this year, you pay the fee and you do this, and the next year you have to come back. So it's a very valid model. And by the way, for our ASP versions of accounting, it's also a subscription business.

The specific issue around the desktop is, the desktop's not dead. There's a lot of legs left in that product, and our small businesses have shown significant willingness to continue to use the product, and we believe that there's a lot of opportunity to do more with that product than we have done, not in lieu of focusing on this just on the Web, but in addition to, and just rethinking the relative balance and emphasis of our investments and efforts, given where the near- to medium-term opportunities are.

You talked about shifting your research and development emphasis from experimental, high-beta businesses to lower-risk, more immediately useful ones...
The discussion we just had was an example of that.

Right, right. In terms of research and development, what kind of balance are you trying to strike there?
I think the balance is literally a balance of the near term and the long term. And it's a continually shifting balance, because we invest in things recognizing that they are higher-beta portions of our investment portfolio and we don't know how they will turn out sometimes, or at least not with high certainty.

As we learn and gain experience in some of these investments, we shift our relative emphasis in R&D. And if you look back over the last year, we made some tough decisions to get out of businesses which were, in essence, investment businesses for us if you look back over time, like our insurance business.

So we're continuing to evaluate that all with the context of or the overall guiding principle that we're going to deliver on the commitment we've made to our investors for the near term and for the long term.

So there's no goal for the year?
There's no magic percentage of revenues on R&D that we hold fixed. We really do look at it in the context of what that return on investment is, and the relative mix of our business in high-risk and lower-risk opportunities.

Speaking of beta businesses, executives said they don't see a divestiture in the cards for Quicken.com, so how do you revive that business?
We're looking at a lot of different things. The first thing that we've done, which was related to the announcement of the layoffs in that business, was essentially make sure that we have an economic model that can be supported based on the revenue opportunity that we see. So we've in essence right-sized that business.

And we're looking. We're not ready to talk about anything specific, but we are looking at ways that we can drive more value out of that great asset that we have: millions of customers who use and love the product, and a very well-known brand.