Why These Times Are Not So Taxing For Intuit

At irs.gov, the very first link is Free File -- an invitation to use, gratis, the sort of tax-preparation software that often goes for $30 or more. That would seem to be handwriting on the wall for Intuit (INTU ), one of the companies that Uncle Sam lassoed into the Free File initiative and the maker of the leading tax software, TurboTax.

Investors are worried, keeping a lid lately on Intuit's shares, near 41. Yet as I do my own Form 1040 (with an assist from TurboTax), I can't help thinking the market is obsessing over the threat of Free File while missing the opportunity it presents Intuit. At the same time, investors seem to be downplaying the Mountain View (Calif.) company's many strengths. On Feb. 17, Intuit reported 5% growth in its latest-quarter revenues, which, in addition to TurboTax, include sales of its personal-finance software Quicken, small-business software QuickBooks, plus a variety of other products and services. The picture is bright enough that, for fiscal 2005, ending in July, CEO Stephen Bennett raised his estimate of revenue growth from as little as 6% to at least 8%.

SO WHY THE CLOUD OVER THE STOCK? Nagging worries about Free File, for one. Another problem may be that, with the passage of time, Intuit no longer appears to investors to be a sprightly Silicon Valley star with hot prospects. Based on such expectations, the stock traded just two years ago at more than 70 times trailing earnings. Dismay that it can't grow fast enough to support such multiples now has it trading at 24 times the last four quarters' earnings. Yet business keeps expanding nicely, with operating margins this year widening from 15% to 15.8%.

Fueling Intuit's growth is a vast extension of software titles. For example, where QuickBooks had come in a couple of versions, the brand now anchors titles aimed at a whole bunch of niches. There's QuickBooks Simple Start, QuickBooks Enterprise Solutions, QuickBooks Professional Services Edition, QuickBooks Contractor Edition, and more. To see how widely QuickBooks has been adopted by American businesses, search the name at Monster.com or CareerBuilder.com, where employers look to hire people with QuickBooks expertise. I tried that the other day and got 1,000 help-wanteds at Monster and more than 1,500 at CareerBuilder.

Such ubiquity, which extends to category leaders Quicken and TurboTax, spells steady cash flow. In the past four quarters, on $1.9 billion in sales, Intuit generated $572 million in cash from operations. It spent $43 million on capital projects. So, with other cash it took in from exercises of employee stock options, it had free cash flow enough to buy in $633 million in stock. Given the strength of its balance sheet -- cash and liquid investments of $885 million against no debt -- Intuit is likely to keep buying shares with its free cash flow. Bennett also told me that if investors want one, Intuit would pay some of its cash out in a dividend.

Meantime, Intuit is doing what it does best: taxes. The Internal Revenue Service's Free File program, which encouraged some 20 tax-prep companies to offer basic service for free, siphons off a small part of the total market. Of 130 million returns filed in 2004, 3.5 million used Free File, according to Bennett. Filers who choose TurboTax make the company money, as many opt to buy Intuit's service for preparing state income tax returns. Demand is strong enough that Intuit is raising those prices, which vary by state.

Taxpayers who come to TurboTax via Free File are decidedly younger than average, and Intuit aims to convert them to fully paying software users as they age into more complicated tax situations. "Free," Bennett says, "is not free." This is one more ugly truth about tax time -- and reason to think talk of Intuit's trouble is exaggerated.

By Robert Barker

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