Intuit: Benefiting From Shift To Online Ecosystem (NASDAQ:INTU)

This analysis examines Intuit Inc. (NASDAQ:INTU) and its ongoing transition towards its Online Ecosystem and Software as a Service. The focus is on the company’s growth drivers, with an initial comparison between its online and desktop customer bases. Additionally, we evaluate the company’s ARPC (Average Revenue per Customer) for both its online and desktop ecosystems. Lastly, we investigate the operating margins of Intuit’s SBO, Consumer, Credit Karma, and ProConnect segments to ascertain whether the shift from desktop to Online Ecosystem is positively affecting its margins.

SMB Segment Revenue ($ mln)	2017	2018	2019	2020	2021	2022	Average
QuickBooks Online Accounting	449	695	980	1,354	1,699	2,267
Growth %		54.7%	41.0%	38.2%	25.5%	33.4%	38.6%
Online Services	409	511	683	828	1,051	2,171
Growth %		25.0%	33.7%	21.2%	26.9%	106.6%	42.7%
Total Online	858	1,206	1,663	2,182	2,750	4,438
Growth %		40.6%	37.9%	31.2%	26.0%	61.4%	39.4%
QuickBooks Desktop Accounting	842	716	732	755	789	851
Growth %		-15.0%	2.2%	3.1%	4.5%	7.9%	0.5%
Desktop Services and Supplies	874	1,139	1,138	1,113	1,149	1,171
Growth %		30.4%	-0.1%	-2.2%	3.2%	1.9%	6.6%
Total Desktop	1,716	1,855	1,870	1,868	1,938	2,022
Growth %		8.1%	0.8%	-0.1%	3.7%	4.3%	3.4%

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Source: Company Data, Khaveen Investments

From the table above, Intuit’s Online Ecosystem had a 5-year average growth of 39.4%, compared to its Desktop Ecosystem with a growth of 3.4%. Excluding its recent acquisition of MailChimp which is integrated into its Online Ecosystem, it still has a growth of 33.9%. Despite the Online Ecosystem bringing in more than twice the revenue of the Desktop Ecosystem, its average growth is more than 10x the Desktop Ecosystem which indicates customers shifting preference toward online ecosystems.

As highlighted in Intuit’s Q1 FY2023 earnings briefing, CEO Sasan Goodarzi explained how its “AI-driven expert platform strategy would accelerate its innovation”. As Intuit’s online paying customers as a % of total customers had increased from 32% to 88% over the past 10 years, and with the significant revenue growth seen from its online ecosystem, we analyze its growth drivers for its Online Ecosystem.

The digitalization shift is further supported by the increase in the number of internet users over the past 10 years as the online penetration rate increased from 22.8% in 2008 to 67% by 2022, we further forecasted the internet penetration rate to reach 86.3% by 2027 based on the 10-year average internet user growth rate of 8.3%.

Solid Growth of Online Customers

Total Paying Customers (‘mln’) (excluding MailChimp)	2018	2019	2020	2021	2022	Average
Online Customers	3.5	4.5	5.0	5.7	6.2
Growth %	–	28.6%	11.1%	14.0%	8.8%	15.6%
Desktop Customers	1.1	1.2	1.1	1.0	1.0
Growth %	–	9.1%	-8.3%	-9.1%	0.0%	-2.1%
Total Paying Customers	4.6	5.7	6.1	6.7	7.2
Growth %		23.9%	7.0%	9.8%	7.5%	12.1%

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Source: Company Data, Khaveen Investments

For Intuit’s Small Business & Self-Employed segment, its total paying customers have a 4-year average growth of 12.1%, mainly led by the growth of Online Customers of 15.6%. However, Desktop Customers have seen a slight decrease in customers since 2019 with a 4-year average decline of 2.1%.

From the company’s Investor Day presentation, 2 of the 5 big bets highlighted were “to be the center of small business growth and disrupt the small business mid-market” using its AI-driven platform. With the growth in the number of SMBs in the US reaching 12.2% between 2017 and 2022, we believe Intuit could be able to capitalize on the opportunity of providing an online ecosystem to its SMB customers.

Additionally, the online accounting software market is also expected to grow at a CAGR of 8.6%, reaching $4.13 bln by 2024 according to Report Ocean. Moreover, the company’s QuickBooks Online segment had grown at a much higher average of 38.6% in the past 5 years.

Total Paying Customers (‘mln’) (excluding MailChimp)	2022	2023F	2024F	2025F	2026F	2027F
Online Customers	6.2	7.2	8.2	9.3	10.5	11.7
Growth %	–	15.6%	14.6%	13.6%	12.6%	11.6%
Desktop Customers	1.0	1.0	1.0	0.9	0.9	0.9
Growth %	–	-2.1%	-2.1%	-2.1%	-2.1%	-2.1%
Total Paying Customers	7.2	8.1	9.2	10.3	11.4	12.6
Growth %		13.2%	12.6%	12.0%	11.3%	10.5%

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Source: Company Data, Khaveen Investments

We projected the online customer growth based on its 4-year average for FY2023, tapering it down by 1% for every subsequent year. For desktop customers, we projected its decline using its 4-year average too which leads to our forecast of its total paying customer growth at an average of 11.9% for the next 5 years, reaching 12.6 mln paying customers by 2027.

Increasing Online ARPC, but Desktop ARPC Still Leads

Average Revenue Per Customer (excluding MailChimp)	2018	2019	2020	2021	2022	Average
Online Ecosystem Revenue ($ mln)	1,206	1,663	2,182	2,750	3,676
Online Customers (‘mln’)	3.5	4.5	5.0	5.7	6.2
Online Paying ARPC ($)	345	370	436	482	593
Growth %		7.3%	18.1%	10.6%	22.9%	14.7%
Desktop Ecosystem Revenue ($ mln)	1,855	1,870	1,868	1,938	2,022
Desktop Customers (‘mln’	1.1	1.2	1.1	1.0	1.0
Desktop Paying ARPC ($)	1,686	1,558	1,698	1,938	2,022
Growth %		-7.6%	9.0%	14.1%	4.3%	5.0%

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Source: Company Data, Khaveen Investments

Based on the table, the ARPC of the Online Ecosystem has a 4-year average growth of 14.7% from $345 to $593 in 2022. This is almost thrice the Desktop Ecosystem’s 4-year average growth of 5.0%. Including the acquisition of MailChimp, the online paying ARPC of 2022 would be $634, a 31.4% growth compared to 2021. As desktop-paying ARPC is almost 4x higher than online-paying ARPC, we believe Intuit is incentivized to attract desktop customers.

We believe the increase in online paying ARPC is due to the increasing monetization of its new product innovations such as QB Live, QBO Advanced and premium SKUs as highlighted in its Investor Day presentation. Moreover, we expect its ARPC to continue increasing as the company highlighted its commitment to developing new offerings in its Q1 2023 earnings briefing.

We’re innovating at a high velocity using the power of our platform and modern technology capabilities to deliver new offerings at scale focusing on breakthrough adoption.” – Sasan Goodarzi, Chief Executive Officer

Additionally, we believe this could provide more synergy opportunities from the integration of MailChimp and other recent acquisitions as mentioned in our previous analysis on Intuit.

Revenue Forecasts	2022	2023F	2024F	2025F	2026F	2027F
Online Paying ARPC ($) (‘a’)	634	727	827	932	1,041	1,152
Growth %		14.7%	13.7%	12.7%	11.7%	10.7%
Online Customers (‘mln’) (‘b’)	7.0	8.1	9.3	10.5	11.9	13.2
Growth %		15.6%	14.6%	13.6%	12.6%	11.6%
Online Ecosystem Revenue ($ mln) (‘c’)	4,438	5,885	7,669	9,819	12,351	15,260
Growth %		32.6%	30.3%	28.0%	25.8%	23.6%
Desktop Paying ARPC ($) (‘d’)	2,022	2,122	2,228	2,338	2,454	2,576
Growth %		5.0%	5.0%	5.0%	5.0%	5.0%
Desktop Customers (‘mln’) (‘e’)	1.0	1.0	1.0	0.9	0.9	0.9
Growth %		-2.1%	-2.1%	-2.1%	-2.1%	-2.1%
Desktop Ecosystem Revenue ($ mln) (‘f’)	2,022	2,078	2,136	2,195	2,256	2,318
Growth %		2.8%	2.8%	2.8%	2.8%	2.8%

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*c = a x b, f = d x e

Source: Company Data, Khaveen Investments

Using Intuit’s online ecosystem’s 4-year average ARPC growth but tapered it down by 1% for every subsequent year, we forecasted its online paying ARPC to reach $1,152 by 2027 with a total Online Ecosystem revenue of around $15.3 bln including the MailChimp acquisition. In comparison, based on the historical Desktop paying ARPC growth of 5.0%, we estimated its ARPC to reach $2,576 by 2027 with Desktop Ecosystem revenues reaching $2.32 bln. We believe this forecast is appropriate as Intuit continues to add more features to its Online Ecosystem while committing to its long-term expansion plans overseas.

SBO Segment Margins Still Lower than the Consumer Segment

Segment Operating Margins ($ mln)	2017	2018	2019	2020	2021	2022
Small Business & Self-Employed Revenue (‘SBO’)	2,574	3,061	3,533	4,050	4,688	6,460
SBO Operating Margins	43.2%	43.3%	43.8%	51.6%	55.2%	54.2%
Consumer Revenue	2,182	2,508	2,775	3,136	3,563	3,915
Consumer Operating Margins	63.1%	63.3%	62.8%	65.8%	62.8%	63.4%
Credit Karma Revenue					865	1,805
Credit Karma Operating Margins					21.0%	29.4%
ProConnect	440	456	476	493	517	546
ProConnect Operating Margins	60.5%	62.3%	66.8%	70.2%	72.0%	70.1%
Total Net Revenue	5,196	6,025	6,784	7,679	9,633	12,726
Total Operating Margins	53.0%	53.1%	53.2%	58.6%	55.9%	54.2%

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Source: Company Data, Khaveen Investments

Based on the table above, we calculated operating income as a % of revenue and observed that its operating margins have increased from 53% in 2017 to 54.2% in 2022. A sharp spike in operating margins for 2020 is due to a reorganization of support functions from all segments to the corporate level, thus reclassified under corporate expenses. The decrease in margins in 2021 is due to its Credit Karma’s acquisition and for 2022, due to a one-time charge of $141 mln related to a TurboTax lawsuit settlement where Intuit misguided “millions of customers into buying online products deceptively advertised as free” according to Reuters.

From its Q1 2023 earnings briefing, management has also commented…

We have a large TAM with low penetration, secular shifts working in our favor, a diversified large-scale platform where we continue to invest heavily in innovation across our 5 Big Bets to deliver benefits for our customers, resulting in top-line growth and margin expansion. – Sasan Goodarzi, Chief Executive Officer

Considering the SBO segment margins are lower than the total company margins, we believe that Intuit’s margins might decrease due to higher costs as the company stated that it plans to “invest in premium features such as advanced reporting, SMS, and marketing automation” to achieve its “Big Bet 4” which is to be the center of small business growth.

Risk: Decrease in Desktop Customers

As mentioned briefly in the second point, we believe Intuit is incentivized to increase the number of Desktop Ecosystem paying customers as its ARPU is nearly 4x higher than its online ecosystem. However, due to a projected decline of 2.1% in desktop customers, we expect Intuit to lose revenue from the desktop ecosystem. Intuit has managed to reduce its impact by growing its Online Ecosystem revenue by around 10x more than its Desktop Ecosystem revenue.

As Intuit’s online ARPU and costs are expected to increase due to its expanding Online Ecosystem, free alternatives such as Odoo, HomeBank, Wave and ERPNext might be more attractive to small businesses and the self-employed. We believe these alternatives may impact Intuit’s revenue growth in the long run.

Verdict

To conclude, Intuit has capitalized on secular trends of digitalization to shift from a desktop model to an Online Ecosystem that is able to provide customers with an array of solutions on its integrated platform. We updated its revenue growth forecast of a 4-year forward average of 25.7% for its Small Business & Self-Employed and used management’s revenue growth forecast for its other segments. We updated our DCF valuation with our revised revenue forecasts and terminal values based on Intuit’s 5-year average EV/EBITDA of 36.1x, thus we obtained a price target of $610.69 with an upside of 46% and rated the company as Strong Buy.