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Tickers in this Article: INTU, MSFT, GOOG, HRB
With its near-monopoly position in the tax preparation and small business accounting software markets, software developer Intuit (Nasdaq:INTU) has little trouble turning out quarterly result that beat analyst expectations.

Such was the case in its latest quarterly report, when it reported a modest loss of 10 cents per share, a slightly better outcome than the loss of 12 cents per share that analysts polled by Thomson Financial had been expecting. The company's first quarter has historically shown a loss due to the seasonal nature of its sales. For this fiscal year as a whole, the consensus expectation is that the Intuit will earn $1.61 per share; a roughly 13% gain from the prior year. So, what does Intuit have to offer that makes it a company worthy of your investment dollars?

When You're No.1, Beating Expectations Can Be Easy
For over two decades, Intuit's leading products, TurboTax for tax preparation, and QuickBooks, a small business accounting package, have been the first choice of customers looking to minimize the hassle associated with keeping their tax and business records in line. Each now holds an substantial percentage of the market share in their product markets. For example, according to ThinkEquity, the TurboTax brand holds close to 80% of the market share.

Combined, TurboTax and QuickBooks generate roughly half of Intuit's revenue. With such a significant part of its business coming from a well entrenched franchise, it's little wonder the company has consistently managed to outperform expectations. (To learn more, see Economics Basics: Monopolies, Oligopolies and Perfect Competition.)

Why is the tax software business so lucrative?

Tax and accounting rules change constantly; that guarantees a steady stream of upgrade sales. Secondly, as any small businesses owner can attest to, the complexity of bean counting, even for small enterprises, can be daunting and it's not getting any easier. When you've finally reached a level of comfort with one system, you're not going to want to repeat the whole learning curve process by switching to another. Existing customers, are basically married to a system for life. That's a huge factor in keeping Intuit's market share numbers steady.

Competitors Moving To Carve Off A Bigger Slice
With such attractive fundamentals, it's no surprise that a number of competitors have recently launched their own product offerings into these markets, with hopes of winning a sizable chunk of market share for themselves.

On the tax-prep side, H&R Block (NYSE:HRB) is trying to entice Intuit's customers with its web-based TaxCut offering. On-line filing is the fastest growing method for doing tax preparation and with its established tax preparation reputation, H&R Block could pick up a few market share points at Intuit's expense.

On the accounting side, industry heavyweight Microsoft (Nasdaq:MSFT) recently entered the market with its own accounting package, Microsoft Office Accounting Professional, which has the obvious advantage of being easy to integrate with Microsoft Office. Anticipating Microsoft's competitive challenge, Intuit recently cut a deal with search giant Google (Nasdaq:GOOG) embedding links inside QuickBooks to Google's online marketing tools such as Adworks and Maps. While far from being an alliance, the deal with Google suggests that Intuit likes the idea of having an 800-pound gorilla in its corner should competition with Microsoft intensify.

However, according to a recent report on Intuit by broker ThinkEquity Partners LLC, the 22 million returns filed with TurboTax last year still represents only 16% of the 137 million federal consumer returns filed that year. TurboTax revenues for the Intuit's last fiscal year represented just 4% of the $19 billion total tax prep market.


Untapped Market Should Keep Intuit Growing
While the loss of a few market share points seems inevitable, Intuit should remain the top dog in the tax preparation and accounting markets for the foreseeable future. Moreover, there appears to be sufficient untapped potential in at least one of Intuit's markets, the tax prep market, that might just be enough to accommodate all the participants, providing above average growth opportunities for years to come.

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