A quarter ago, I thought that Intuit (Nasdaq:INTU) was underestimated and underappreciated by the Street. True, the company was (and is) facing challenges in getting the consumer tax business back to better growth and not all of the company's efforts to diversify and grow the business had worked out to plan. But Intuit still has a valuable business with strong market share that produces almost annuity-like cash flow streams. While the shares have outperformed the S&P 500 by about 10% since my last bullish call, I remain confident that there's more to be gained from the company's strategic readjustment.
Closing The Year On A Positive, But Confusing, Note
Intuit's fiscal fourth quarter report wasn't exactly the cleanest earnings report I've seen this week, as the company is restructuring and reorganizing the business in an attempt to improve execution and growth prospects.
Revenue rose 12% this quarter, which was good for a modest beat versus Street estimates. The company's Small Business operations led the way with 13% growth, as both Financial Management Solutions and Employee Management posted double-digit growth and Payment rose another 7%. The tax business was certainly more sedate (with consumer tax down 9%), but this is never a particularly strong quarter for the tax side of the business.
Margins were less positive. Gross margin improved almost five points on a GAAP basis, but operating income (non-GAAP) fell 31% and operating margin contracted almost a point.
SEE: A Look At Corporate Profit Margins
Small Business Looks Okay, But Consumer Tax Needs More Work
Intuit management guided to 10% to 12% growth in the Small Business operations, and this business seems to be on track despite the still-shaky state of smaller businesses in the broader economy. All things considered, Intuit seems to be faring better than Paychex (Nasdaq:PAYX), and Intuit continues to see good online conversion, as QB Online subscriptions rose 28% and online payroll subscriptions rose 18%.
In addition, DemandForce saw better than 40% subscriber growth, and seems to be doing fine relative to Constant Contact (Nasdaq:CTCT) and ExactTarget (recently acquired by Salesforce.com (NYSE:CRM)). Looking a little bit ahead, I continue to believe this could be a good growth driver for Intuit – the company should have a bundling/cross-selling advantage over Constant Contact, while I suspect that Salesforce.com's offerings are aimed at customers larger than the typical Intuit client (suggesting less cross-selling pressure from ExactTarget).
On the flip side, the Consumer Tax business is going to need some more TLC. Management guided growth down to 4% to 5%, which is where many sell-side analysts had already gone. Intuit believes this is a transitory issue and that they can return the business to growth, using new programs like CPA Select to better compete with H&R Block (NYSE:HRB). I'm a little skeptical – I think Intuit can do better on an ongoing basis than the next year's growth rate, but I think management may be overselling its ability to generate meaningfully higher growth on a sustained basis.
SEE: Earnings: Quality Means Everything
Restructuring And Refocusing
With the sale of the Financial Services business to Thoma Bravo for about $1 billion (around $300 million less than Inuit paid back in 2007) and the announced intention to sell the Health business, Intuit is retrenching around what it has always been good at – consumer tax preparation software and software/service offerings that automate and streamline time-consuming accounting functions for smaller businesses.
With the divestitures, Intuit is adding $2 billion to its buyback plans and raising the dividend by 12%. The company should also have a better-looking margin and free cash flow generation profile in the wake of the moves. All of that is fine, but Wall Street has the nasty habit of always worrying about the next growth driver and Intuit will have to convince the Street that there's still opportunities to expand the Small Business operations or the interest in the stock generated by the restructuring efforts will ultimately fade.
The Bottom Line
I'm still basically bullish on these shares. Although I do have some concerns about competitors coveting a piece of that action, Intuit has historically enjoyed a pretty sticky customer base. A long-term growth rate of 6% is sufficient to justify a fair value above $70 and, at its core, Intuit is a business that generates strong returns and cash flows.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.