Intuit Blackout Shows Challenges of Online Makeover

When a power failure knocked out Intuit Inc.’s servers last month, the outage did more than strand 300,000 customers. It showed the challenges in shifting from selling shrink-wrapped software to Internet-based services.

Under Chief Executive Officer Brad Smith, Intuit is aiming to get more than 75 percent of sales from Web-based services and software by 2015. To do that, he plans to continue a run of Internet acquisitions. Smith’s also developing new features and investing in operations to prove that Intuit, best known for its TurboTax and Quicken, can run a reliable online service.

“We don’t have the luxury of going down,” Smith, 46, said from Intuit’s headquarters in Mountain View, California. “We are required to be available 24/7, and we’re doing everything we can to make sure it doesn’t happen again.”

Smith, working with Intuit’s chief technology officer and chief information officer, is analyzing what went wrong in June and working out procedures to avoid future outages. The company also is making its data centers more efficient, in part by shutting down smaller offices and concentrating more of its operations in a state-of-the-art, 240,000-square-foot facility that it built in Quincy, Washington.

Intuit now gets 60 percent of its revenue from online products, up from less than half before Smith took over in 2008. That’s come at a price: During the past three years, the company has spent about $300 million on equipment and networking costs, primarily for the new data center.

What to Avoid

Before becoming CEO, Smith had worked at Intuit for five years, running several business units. To prepare for the top job, he spent three months talking to analysts, employees and board members about untapped opportunities. He also learned what he should avoid.

The upshot: “We wanted to expand into new regions and new markets,” Smith said. “And we wanted to transform ourselves from a desktop company into one that connects to the Internet. That’s been our strategy since January 2008, and it’s informed all of the acquisitions we’ve made.”

Today, the 27-year-old Intuit -- also known for its QuickBooks accounting software -- provides online services to handle small-business payroll and payments, manage health-care costs, pay physicians, build websites, give financial advice and process credit-card charges over mobile phones.

Stock Gains

Intuit’s shares have advanced 33 percent in the past year, with investors betting that the company will enter a new phase of growth. The stock rose 36 cents to $36.28 at 4 p.m. New York time in Nasdaq Stock Market trading.

Sales and profit have rebounded from the recession in the past two quarters, helped by the online expansion. Revenue for the fiscal year ending July 31 will be at least $3.4 billion, Intuit said in May.

“They’re expanding and evolving,” said Gil Luria, an analyst with Wedbush Securities Inc., who has recommended buying Intuit shares for the past year. “Their current business is growing nicely, but they want to ensure many more years of rapid growth, and they are looking for large opportunities to do just that.”

Intuit made its highest-profile bet with last year’s $170 million purchase of Mint.com, an advertiser-supported service that pulls in data from consumers’ accounts, analyzes spending habits and creates graphics that show how much they’ve spent on everything from groceries to entertainment.

The service also lets users set up alerts so they can be notified when their spending in any category climbs above preset limits. Mint serves 3.3 million users, including Dena Stern, 26, a San Francisco-based freelancer who works for nonprofits.

Saving Money

“They have really great tips on how to save money,” Stern said. “Now I’m packing my lunch, eating healthier and saving hundreds of dollars a month just doing that.”

That’s the kind of praise Smith is counting on to help build out Intuit’s services. The company plans to add some of Mint’s features to other programs, eventually giving users of Quicken Online the same investment advice Mint subscribers get.

Even as it becomes more enmeshed in the Web, Intuit isn’t abandoning the mission on which it was founded: finding complex financial tasks that bedevil consumers and small-business owners, and simplifying them.

Intuit introduced Quicken in 1983. With it, people had an easy way to balance their checkbooks and track spending. Next came QuickBooks, bookkeeping software for companies with fewer than 20 employees. It acquired TurboTax in 1993. This year, 21 million taxpayers prepared and filed their returns with the software.

PayCycle, Medfusion

In addition to Mint, Intuit has bought Web-based payroll service PayCycle and Internet portal Medfusion, used by physicians’ offices to schedule appointments and accept patient payments. Those deals came after the 2008 purchase of Electronic Clearing House, an online service that lets merchants process check and credit-card payments.

Intuit is making some of its biggest bets in the health- care market, focusing on offices with 10 or fewer doctors. It already offers a Web service that let consumers track and manage health-care expenses. The Medfusion acquisition gives patients a quick way to pay their medical bills.

Smith declined to say how much of Intuit’s $1.93 billion in cash and short-term investments he plans to spend on acquisitions.

“We’re diversifying -- constantly looking for things we can bring to our customers,” said Grieg Coppe, head of Intuit’s acquisition efforts.

Online Challenges

Managing customers’ online programs, data and transactions has its set of challenges, as Intuit learned last month. That’s when the computers running Intuit’s Internet services sputtered because of a power failure triggered during routine maintenance.

Now he needs to reassure Intuit’s millions of customers they can rely on the company, said Sasa Zorovic, a Boston-based analyst with Janney Montgomery Scott LLC.

“The challenge of convincing people to entrust their work and their data online isn’t a slam dunk,” Zorovic said. “Small businesses, especially, have concerns about how safe their data is.”

In the weeks since the outage, Smith said he’s reached out to customers, asking them how Intuit could ease their concerns. Some asked for a few months of free service, while others wanted assurances it won’t happen again. Smith declined to say how much Intuit has spent to beef up its systems.

“The cost wasn’t material to us,” said Smith. “But it was to our customers. We are working to earn their trust.”

To contact the reporter on this story: Rochelle Garner in San Francisco at rgarner4@bloomberg.net

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