Thursday, December 17, 2009

Intuit Shareholder Meeting (2009)

I attended Intuit's (INTU) annual shareholder meeting in Mountain View, California on December 15, 2009. Upon entering Intuit’s building, shareholders were offered complimentary copies of either Quicken Premier or an Investments and Rental Property tracking software. Intuit also offered shareholders Peet’s coffee, Odwalla juices, mineral/bottled water, and various pastries.

I won’t hide my fondness for Intuit. I’ve been using Intuit’s products for years, and I think the company is a godsend for small businesses. CEO Brad Smith--who looks similar to Matt Damon--handled most of the meeting, which included a thirty-minute presentation. Below are the highlights of his presentation:

Although Americans have experienced high unemployment, small business formation has not trended upward, possibly because small businesses lack access to bank capital.

Intuit has acquired and PayCycle, an online payroll service.

80% of Intuit’s sales come from word-of-mouth, i.e. personal recommendations.

1/3 of U.S. tax returns are filed using some Intuit software.

Intuit's major competition is the pen-and-paper (people don't use computers to do their taxes).

1/12 Americans are paid with Intuit’s payroll services.

Intuit is trying to improve first use and first year user retention. [Intuit users tend to remain loyal customers, but the difficulty is getting them to break old habits and learn new how to navigate a new piece of software.]

Intuit is focusing on emerging markets, such as India, and healthcare. The CEO mentioned that the average patient gets three medical bills before returning a payment, but Intuit’s software reduced turnaround time significantly. Cigna and other select healthcare providers use Intuit’s software, so it is not yet available to all patients or medical offices.

The Q&A session began with a shareholder questioning Intuit’s stock price. The shareholder compared Intuit’s stock price to Adobe’s (ADBE) over the past ten years. During that time period, Adobe shares have increased over 100% in value (10% annually), while Intuit shares have returned about 15%, or just 1.5% a year. The shareholder implied that R&D expenditures–which he cited at between 16 and 17% of revenue–were too high.

CEO Smith responded that Intuit’s R&D expenditures were in line with competitors’ R&D expenditures, and the reason Intuit’s stock price hasn’t performed better is because of a disconnect between the company’s expectations of growth and Wall Street’s expectations of growth. While Wall Street believes Intuit will likely grow only in the single digits, Intuit believes it will achieve double-digit growth, which should justify a higher multiple. Since Intuit already has a high share of the American market relative to competitors who offer similar products, there doesn't seem to be much room for domestic growth, and significant growth in international markets will take time.

I suggested that Intuit create an Audit-Defense software that would provide consumers with peace of mind in case of an audit. Right now, there are many consumers who have envelopes and/or folders filled with business expense receipts, as well as separate envelopes for canceled checks. Many consumers would appreciate a product that allowed them to ensure their receipts matched expense data entered in Quicken and/or TurboTax. Intuit could easily create a software program that reconciled consumers’ physical receipts and canceled checks with their expense entries on Quicken and/or TurboTax. This proposed product should include a mini-scanner to allow users to scan and upload jpegs of their business-related receipts so all of their data would be in one convenient place in case of an IRS audit. CEO Smith responded that Intuit was already working on something similar to my idea called QuickReceipts.

I also asked how Intuit planned on making money from its acquisition. I sometimes read's blog, but I don’t usually click on any ads on the website, and I don’t pay any money to use CEO Smith said that Intuit planned on making money through referral fees from’s “ways to save” engine, which is similar to the way Google makes money from its AdWords program.

I mentioned that Intuit's biggest threat probably wouldn’t be another competitor, but its own potential mis-steps. Perhaps Intuit should make a more tangible assurance of its security capabilities. Why not advertise that if anyone actually gains access to a user's personal data, Intuit will pay the affected user $100,000? Why not put its money where its mouth is, and win over the remaining online skeptics? For example, LifeLock has a $1 million guarantee against identity theft. If Intuit had a similar policy, wouldn't more consumers trust the company and feel more comfortable rejecting the old pen-and-paper method? Intuit would probably argue that it would be foolish to issue a worldwide challenge to hackers, and there is no such thing as an "unhackable" database. Intuit's cautious approach is probably the right one, but without a guarantee, how will it convince the pen-and-paper holdouts to use its software?

I respect and admire Intuit, but I can also understand why Wall Street is hesitant to bid up its shares. Intuit runs its company like engineers who happen to have MBAs–conservative and focused on consistent growth without unnecessary risk. Wall Street must imagine Intuit to be a leaner Microsoft (MSFT), if Microsoft owned only its Office software suite–a highly profitable company with low maintenance products, but nothing revolutionary or indicative of a major paradigm shift like an iPod or a Google. If Intuit wants Wall Street’s respect, it needs to spend its ample cash and roll out riskier initiatives.

In conclusion, Intuit may believe it is growing adequately each year, and therefore has no need to make radical moves, but New York money managers probably view Intuit as a stodgy company that refuses to take risks. Indeed, one has to wonder why Intuit couldn’t invent something similar to instead of having to buy it. Isn’t it a little strange when a software company’s most touted new product ( was made by another software company?

Intuit needs to make up its mind: either be like Microsoft and pay a decent dividend and focus on consistent growth, or act like a growth company and use its cash to invest in new ventures or riskier acquisitions. Taking the middle ground–safe and steady–won’t gain Wall Street’s respect, even if Intuit is clearly an amazing company with good management.

Disclosure: I own an insignificant number of Intuit shares. I am also a user of its software.

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