Intuit：小企业的操作系统——[Business Breakdowns，第77期]

Today, we’re breaking down Intuit. Started by a former Procter & Gamble employee in 1983, Intuit has grown into the premier platform for consumers and small businesses to manage their finances and pay their taxes. Along the way, it has fought off significant competition from Microsoft and others and delivered handsome returns for its shareholders.

In recent years, it has spent over $10 billion in cash and stock adding Credit Karma and Mailchimp to its platform of services. To break down this $100 billion-plus market-cap company, I’m joined by Andy Gardner, deputy CIO and portfolio manager at Findlay Park. Please enjoy this business breakdown of Intuit.

Okay, Andy, thank you for joining us to break down Intuit. Intuit is one of the largest personal, prosumer, and professional accounting software companies globally, but it’s fascinating to me that a business with such a storied history has very little in the way of brand recognition. If you can set the scene by telling us what Intuit does and how big it is, that would be a great starting point.

Thanks, Matt. Intuit is an almost 40-year-old software company that has sustained itself through different technology cycles, and it’s been one of the very best and most durable compounders in the technology space.

If you picture the brands under its umbrella—TurboTax, QuickBooks, Credit Karma, which now subsumes Mint, and more recently Mailchimp—across those brands, they amassed around $13 billion of revenue last year and traded at a market cap of around $120 billion.

If we can dig a bit deeper into the size and scope of those four brands and who the key customers are for each one of them, let’s start with consumer tax.

To set the scene, the U.S. runs a self-assessment system for federal and state taxes. Each year, in the run-up to April, around 40% of Americans file their own taxes without the aid of an accountant.

It’s generally cheaper to do so, but you need to have confidence that you can answer the questions, that you’ll withstand an audit, and that you’re going to get the best refund possible. Of those who choose to do it that way, about 30% file their taxes with Intuit’s TurboTax, and that’s about 35% of total revenue.

The next bucket is small-business and self-employed software, which is just over half of revenue. In that segment, they lead with a family of bookkeeping solutions called QuickBooks that have around 90% share in the U.S. within their category.

Those products are aimed at businesses with between 1 and 10 employees. Picture your local restaurant, lawn-mowing firm, or plumber. They’ll use the software to keep their accounting records and purchase orders, record inventory, and perhaps issue invoices to customers.

There are around 6 million businesses using that platform, out of 75 million addressable customers that Intuit thinks they can reach over time, so it’s less than 10% penetrated. They also offer payroll solutions to pay employees and merchant services to accept payment of invoices.

Put those 2 segments together and you’ve got about 80% of revenue, so let’s call them the core four for now. Then, in the last couple of years, Intuit made 2 relatively large acquisitions by its standards.

The first was Credit Karma, which is used by 40 million users every month to monitor their credit score and see what products they can apply for without any deterioration being caused in their credit score by failed applications. Then there’s Mailchimp, which is really a sort of email-management and customer-relationship-management tool for small businesses.

On those last 2, I get the sense that investors are trying to figure out where those pieces fit, and I’m sure we can double-click on that later.

If I think about Intuit and its evolution, the founding story has analogs to Richard Barton’s power-to-the-people framework. They’re giving consumers, professionals, and small businesses the technology they need to serve themselves and increase transparency, which presumably should unlock opportunity for them.

If we take a step back and talk briefly about how the company was founded—why it was founded, and how it went from Quicken into the small-business accounting and consumer-tax businesses it has today—how did that happen?

The analog you’ve drawn to Rich Barton and his philosophy is really apt. Another thing he’s out there with is having described the best consumer-facing technologies as a mixture of art and science.

His description of the art is about having deep empathy with your customers’ problems and being imaginative about how to solve them. The science is how you use data and feedback loops to continue improving the user experience.

So let’s get to Scott Cook in 1983, the founder of Intuit. Unlike Rich or the archetypal tech founders, Scott was not a technologist by background. In fact, he was a marketer whose formative years were spent at Procter & Gamble.

Frankly, P&G has this great lineage of developing superior consumer understanding. They conduct lots of experimentation, they’re maniacal about gathering feedback loops and running focus groups, and many of their best innovations have come from those types of lenses on the consumer.

Not long after Scott left P&G, he was confronted by a real-life customer problem: watching his wife trying to manage the family checkbook at the kitchen table. These were the days long before internet banking or live statements.

To pay your bills each month, you had to manually write out numerous checks and then keep a running total of incomings and outgoings. If you left this task until the last thing on a Sunday night, it was pure drudgery.

Personal computers were becoming popular, and Cook was inspired to think that a computer program could save people like his wife from this mundane task. But he didn’t have the tools to implement it, so he drove down to Stanford’s campus with a help-wanted sign and enlisted the help of an undergraduate called Tom Proulx.

Together, they put together a simple program for editing, printing, and calculating checks, and that was called Quicken. As it happens, he wasn’t alone in seeing that market opportunity. By the time they had released their product, there were several others hitting the marketplace.

Where Quicken turned out to be differentiated was that it absorbed all the feedback from various focus groups and opted for beautiful ease of use, so a novice user could be up and running within 10 minutes. The competitors on the market were a feature-rich mess, with very long setup times and very high complexity. They were products of engineering ego rather than consumer insight.

When it came time to incorporate the company that would house Quicken, Cook decided to call it Intuit, which means to understand by intuition. That is what he wanted his customers to experience when they interacted with the company’s products.

That’s a fascinating history. The fact that it was led by a consumer-packaged-goods-focused professional is really interesting. How did it evolve from Quicken into the core franchise of small-business accounting and consumer tax that it’s known for today?

On the small-business side, the story sits somewhere between serendipity and making your own luck, but it definitely comes back to the consumer-listening theme I just laid out.

A couple of years after Quicken had been launched, the team was putting survey content into the floppy disks that they sold in retail channels. They had inadvertently included a question about what people were using the software for: personal use, business use, or both.

To their surprise, around half the respondents identified themselves as using the program for business, which didn’t make any sense to the team. Why would small businesses be avid users of a personal-finance tool?

There was an inclination to dismiss the findings, but Cook insisted they rerun the survey. He got on the phone with the dozens of customers who had identified themselves as business users, and what they discovered was that businesses were using Quicken as a good-enough solution to do bookkeeping.

That was the formative insight behind QuickBooks. The market was radically underserved and could do with a piece of formal bookkeeping software. But again, the same caveat applied: They understood that if you’re a small-business owner, the owner’s spouse, or the office manager, you didn’t actually get into this to do accounting.

They abstracted away all of the complexity with a really simple user interface. On the tax side, that came a few years later, in the early 1990s.

At the time, it was popular for PC makers to sell a bundle of software: a few floppy disks, with Quicken for managing your personal finances, Excel for spreadsheets, and maybe TurboTax for filing personal taxes.

Around that time, Microsoft was making a real push with Excel, and they saw the other components within that bundle as useful. They made a lowball offer to acquire Intuit, which was rebuffed. Upon being rebuffed, they decided they would get into the bundle directly. They launched a product called Microsoft Money to compete with Quicken.

This gave rise to a defensive move. Fearing disintermediation, both Quicken and the maker of TurboTax decided they were better off bundling together formally, and they consummated a merger.

The way the whole thing played out was that Microsoft Money had failed to delight consumers. Microsoft outsourced all the consumer insight to external teams of PhDs, whereas Cook had his engineers sitting directly with consumers, hearing about their pain points and feedback.

Fast-forward to 1994. With Microsoft having failed to get into the space, they came knocking again and offered to acquire Intuit for $1.5 billion—a big price tag at the time, but a measly 1% of the current market cap.

It all proved to be too soon after Microsoft’s antitrust problems in the early 1990s, and the deal was ultimately blocked by the DOJ. Since then, Microsoft has made several failed attempts to unseat each of Quicken, QuickBooks, and TurboTax, and every time Intuit defended its territory.

Why do I give you that color? There’s the broad intrigue of the founding story, but I think, at a base level, when we think about the evolution of Intuit, it has been born of this deep sense of paranoia. The world’s biggest software business could come and attack them at any time.

Ultimately, they’ve cleverly layered moats around their business and stayed very focused on customer delight.

That overarching history gives me a better understanding of the core businesses and their history. I think it would be interesting if we next explored the value proposition of their products.

You’ve touched on it briefly, but I want to better understand the basic economic model of each of the 4 major businesses. Is the software business a service business? Should it be considered SaaS? How do investors think about it? And how are the products priced for the actual customer?

Let’s start with tax. It’s a software product that delivers the tax questionnaire. You go through that process, and when you’re happy with your return, you pay Intuit when you click and submit that return to the IRS.

If you’re a low-income consumer—around 8 million of the 40 million returns that Intuit processes—you don’t pay anything. Above the income threshold, you generally do pay Intuit. The average revenue per customer is around $60 overall, and that’s about a quarter of what you would pay in an assisted channel, like a tax store or a CPA’s office.

The basic value proposition there is the convenience of not leaving the kitchen table and a big price saving. I’d ultimately classify that as transaction software, but it’s very recurring in nature. Taxes are mandatory, they’re annual, they change a bit each season, and Intuit has a very solid position there.

In the last couple of years, Intuit has been gaining real traction with an add-on or premium service called TurboTax Live. To simplify, think about this as Uber for accountants rather than taxis.

What that allows you to do is be directly routed to a video chat with an accountant right at the point where you encounter a difficult question. The routing will take you to an expert who’s proficient in that particular question, and ultimately that solves some of the confidence issues around filing taxes online.

On the QuickBooks side, they lead with bookkeeping software, and that’s pretty much conventional SaaS. A small minority are on desktop subscriptions, but it’s all recurring revenue. The median price paid by the consumer for that product is around $70 a month.

They may then choose to add payroll software or payment software. Payroll is priced at a per-employee rate, and payments are charged at a competitive interchange rate if you’re issuing invoices and receiving payment on them by card.

Getting to the value proposition, as I addressed in the opening, the vast majority of the market here is unpenetrated. Businesses are using an improvised method of record-keeping—maybe a shoebox of invoices and Excel—and QuickBooks is really offering time savings and automation.

You can directly ingest payments you’ve received from Square, invoices you paid via Bill.com, or purchase records for supplies you bought on Amazon Business. Small businesses that adopt this software generally report better cash-flow management, higher survival rates than those that don’t, and better access to capital. It’s a very solid value proposition for them.

I’ll briefly cover the monetization model for Mailchimp and what it is. This is more traditional SaaS: You manage customer relationships in the Mailchimp software and run email and social-media campaigns.

They’ve attracted 13 million users on a freemium model, but once your customer list or your email velocity reaches a certain size and scale, you’re generally ushered into a paid offering of between $11 a month and $300 a month for a really heavy user.

The value proposition there is better access to growth—customer acquisition in a managed way.

Finally, on Credit Karma, it’s a leading consumer-finance website with 100 million members and 38 million of them engaging monthly. Members on the site are thoughtfully tracking their credit scores and seeking to understand how they can apply for financial products, including understanding which products they would be pre-approved for or have a high likelihood of approval for, so they don’t suffer the kind of credit denial that would impair their credit score.

That’s one of these familiar killer consumer-internet models: free at the point of consumption and ad-supported. It provides a very good signal for advertisers of financial products because the people there are, in one sense or another, trying to understand how they can qualify for products. There’s very high search intent, which makes them attractive to advertisers.

I’m sure we’ll spend more time later in the conversation on why these businesses do or don’t make sense together, and what the imperative was to bring them together over time.

Another aspect I want to dig deeper into is that, as it’s known today, QuickBooks is the dominant plumbing in tax and accounting software for small and medium-sized businesses. Maybe I’m right in assuming that there are some weak network effects in that accounting professionals and businesses pursue something like QuickBooks to be the operating language of business and personal accounting software.

I think about the way financial professionals use Microsoft Office in a similar way. Is that the right way to think about how they land and expand in the enterprise?

Yes, I think your comparison to Microsoft Office, in terms of selling productivity to non-technologists, is apt. Another comparison that comes to mind is that QuickBooks, with its 90% market share of small-business accounting in the U.S., has become the standard.

I always recall a conversation with the former CEO of Moody’s, Ray McDaniel, who described his business as a standards business. It’s one where the network effects created by your past sales give you the right to make your next sale.

When we think about those past sales for QuickBooks and its incumbency, there are some real advantages. The first of those advantages takes hold with accountants.

Part of the value proposition here is time savings and cash-flow management for customers. There’s a second thing that happens when you sit down with your accountant at the end of the year and try to maximize your deductions.

The accountant needs to have confidence that the records have been kept correctly. Anything less than perfection there, and they’re going to err on the side of conservatism if they have to forensically piece together a shoebox-and-Excel method.

Accountants generally recommend that their small-business clients adopt QuickBooks. The room for another player is somewhat stymied because if accountants had to digest records each tax season from 4, 5, or 6 different software providers, you can bet their practices would run a lot slower.

They act as a friendly referral channel, recommending QuickBooks to their clients. Intuit is also very thoughtful about including accountants in focus groups to run through potential product improvements and the roadmap for years ahead.

This was tested about 6 or 7 years ago, when an Australian accounting-software firm called Xero tried to enter the U.S. market. They did so with a combination of competitive pricing and referral commissions to the accounting community, but they just couldn’t overcome the moat I described a moment ago.

The accountants simply didn’t want to gum up their practices by having a duplicate standard that looked slightly different. Today, if you look at the North American market, Intuit is 50 times the size of Xero and growing faster in percentage terms and hugely faster in dollar terms.

That’s the accountants. The second network effect resides in the ecosystem of complementary products. Most businesses can benefit from using accounting software, but the real magic happens when they sync other products to it and information from other software flows in.

Intuit has always been clear-eyed about having an open platform with open APIs so that major apps can sync very nicely with QuickBooks. Today, around 40% of QuickBooks customers are connecting another app to that product.

If you think about the engineers at those third-party software companies, it’s just not a big priority for them to write a good integration if there’s a third or fourth ankle-biter entering the accounting-software market and looking to link up with everybody. That’s another thing that gates the ecosystem.

This seems like a business that, in some ways, thrives on complexity. The more changes there are to the tax code and credit standards, the more entrenched they become. Whether the economy is expanding or contracting, taxes and credit checks are necessary evils.

Can we spend some time talking about that in the context of it being a barrier to entry for competition like Xero and Microsoft, which you’ve already alluded to?

Before you get to commercial competitors, you have to understand why the government doesn’t play a larger role in tax filing in the U.S.

I don’t have an American tax code to hand, but if I did and threw it down on this table, it would make a very loud thud. The U.S. has woven the delivery of its Social Security system and a myriad of different credits and deductions into the tax process, and that gives Intuit a lot of complexity to abstract away.

That brings us back to their core competency of making simple things intuitive. The complexity also makes it hard for the U.S. government to narrowly apply self-assessment with its own slimmed-down software. There would simply be too many questions in the questionnaire.

The government, in fact, committed a couple of years ago to legislation saying it would not enter the tax-preparation category. Then you’re left with the states. You have 50 different flavors of state tax, and the only state that tried historically was California, with a portal for self-filing taxes. It really failed to gain traction.

Think about that: America’s largest state, with no shortage of public-spirited software engineers, couldn’t get traction with the product. That’s why the government isn’t there.

As it pertains to tax complexity, in the past Intuit would have liked to see that huge tome that is the tax code cut in half. It would have given a much greater proportion of tax filers the confidence that they could use a do-it-yourself platform.

These days, they have TurboTax Live and the fully assisted lineup as well, so at this stage I don’t think they dislike complexity.

The second thing is commercial competition. The number-two provider in the U.S. software category is H&R Block. Many moons ago, they acquired a company called TaxCut, but outside of that, it’s been quite hard for insurgents and upstarts.

The reason is that tax season generally ends with the citizen either receiving their biggest check of the year or writing one of their biggest checks of the year. You want very high confidence that the calculation has been done correctly, and there’s a lot of brand trust infused into that process. That has ultimately been hard for others to overcome.

As an example, Credit Karma, when it was a standalone business, had a free tax-filing offering. They were running that as a play to gather information about consumers that they thought could build an even stronger credit profile—an alternative-data concept that could strengthen their core business.

With the full weight of the Credit Karma brand behind it and all its insights into 40-odd million consumers, they were only able to get to about 3 million filers at peak, which is about 2% market share. In the acquisition process, they had to divest that business to Jack Dorsey’s Block, and it has dwindled since. It’s down to 1.5 million filers in a pretty short space of time.

I think that underlines what a hard space this is to compete in commercially. Finally, going forward, all the connective tissue that Intuit has with the accounting community helps it offer TurboTax Live and fully assisted services.

When we cover the financial model on a GAAP basis, 27% to 28% of revenue is spent on sales and marketing. That’s a huge spend for challengers to overcome in terms of share of voice. Now Intuit can amortize that across not only do-it-yourself taxes, but also the much larger market of partially and fully assisted taxes.

You’ve done a fantastic job laying out the key franchises of the business, the type of financial mechanism, and the network effects that form a pretty defensive business model.

It would be helpful to the audience if we walked through the financial model for the business: the size and scale, revenue growth, margins, and returns on capital. How do you think through the financials of this business?

For the year ended in July, revenue was almost $13 billion. The company has grown pretty consistently over time—every year since 1998, excluding 2015, which was only due to an accounting change around ratable revenue.

The death-and-taxes angle, in terms of inevitability, meant that they even grew during the global financial crisis, by 4% year over year. In the recent context, think of it as double-digit growth, with a number of large product introductions that have accelerated that as of last year.

If you look at organic or pro forma growth for the year just gone, Intuit grew 24%. They beat the initial guide by 8 percentage points, and for this year they’re opening with an organic-growth outlook of 14% to 16%.

For every dollar of revenue, they turn about 80 cents into GAAP gross profit. The R&D-to-sales ratio is 18%, so there’s plenty of vibrancy around the spending to drive new innovation. They’re not resting on the stickiness of these products.

Marketing is important. Tax is a one-shot deal; it’s over by the end of April every year, so from the Super Bowl onward, they run a pretty heavy marketing campaign. They do that because they believe penetration of the overall tax-preparation dollars in the U.S. is still really low.

Sales and marketing are about 27% of GAAP expenses, which gets you to a GAAP operating margin of around 21%. People have different ways they like to think about amortization related to deals. I think you can look more kindly on that if you have a positive outlook on the acquisitions that have been done, which we can talk about later.

If you wanted to add back the noncash amortization from deals, you get to around a 25% cash operating margin. Frankly, there is stock-based compensation, but that’s all been defrayed through the various line items we’ve discussed in a GAAP manner here.

When it comes to free-cash-flow conversion, it’s well in excess of 1.5 to 2 times the level of GAAP net income. Most of the difference there is stock-based compensation, which has gone up in recent years as a function of the sizing of some new acquisitions and Intuit becoming more of a higher-growth company.

Management has framed that, and they will now get leverage out of that line item. They would expect stock-based compensation as a percentage of revenue to stabilize or reduce going forward. In general, the company believes it will grow revenue faster than expenses over time. That’s an operating principle they have.

The company has a stated mission, which used to be about solving problems through software and is now articulating something along the lines of being an expert-driven platform. Will it be more of a body shop, and what does that do to margins?

On the tax side, the live component is the biggest product today, and the payout to H&R Block’s accountants is around 25%. I’d actually expect that to be lower inside TurboTax Live because they’re really fractionalizing the role of the accountant.

The accountant is using a fraction of their time to answer hard questions. You’re using their brain; they’re not re-keying somebody’s data. There are also various processes around document collection and APIs that can pull things through from your brokerage account and so on.

That really means it’s a much higher revenue yield for the accountant, but probably not the same amount of payout for Intuit as, say, an H&R Block tax store. Ultimately, the company’s messaging around revenue growing faster than expenses makes sense to me.

This is a somewhat dominant business, but to your point, they’re still projecting growth rates that are quite healthy. I want to learn more about the culture of the company and its management style that have allowed it to enjoy sustainable growth for such a long period of time. What’s the secret sauce there?

This is actually one of Intuit’s biggest sources of competitive advantage. It can sound trite to say that culture is a source of competitive advantage, but it’s worth walking through some of the history.

When Microsoft first came to challenge Quicken, the internal mantra of Intuit’s resistance movement was that Microsoft couldn’t match its depth of consumer empathy. For a long time, Scott Cook hosted board meetings inside the customer-contact center.

Managers and engineers at all levels were required to spend 12 hours a month talking directly to customers on the phone. Those follow-me-home practices, to learn from consumers, continue even today.

Some of it is around customer focus, and some of it is the quality of the people and the mission. When Microsoft made its overture to Scott Cook in 1994 to acquire Intuit, it offered to run the company as an independent subsidiary and said, again, that this was the best culture it had identified outside of Microsoft.

Microsoft was buying Intuit as much for its culture as its code. In fact, Microsoft had a pretty good track record of simply rewriting the code of acquired companies anyway.

After that deal went away, with the DOJ stepping in, Cook did something pretty unusual. He volunteered that he didn’t think he was the right person to push the company to its next level of development, and they brought in a longtime tech executive and college football coach called Bill Campbell.

Coach Campbell was the subject of a popular business biography called The Trillion Dollar Coach, written by 3 of the top Google executives he had mentored. He was also Steve Jobs’ weekly walking partner and an informal coach to a wide-ranging group of executives in Silicon Valley.

He was a unique individual, and I think he helped implement immensely high standards for Intuit’s CEOs of the future, as well as a range of practices around people management and the ethos that when people come to Intuit, they do so to do the best work of their careers.

Putting this in a competitive context, Intuit’s strategic-planning cycle is 3 years. Most of the CEOs they’ve had have generally completed 2 or 2 and a bit cycles of strategic planning.

I raise that because, without meaning to denigrate them, I can observe that recently there was a 10-year span in which H&R Block had 5 CEOs—just over half of 1 of Intuit’s strategic-planning cycles. That starts to inform a very different model of consistency at Intuit relative to H&R Block.

Fortunately, Sasan Goodarzi, the relatively new CEO of Intuit, seems to be cut from the same cloth as the strong leaders who came before him, sharing many of their traits.

Outside of the C-suite, you’re always looking for clues that the culture has been sustained. You can speak to an expert, of course, and I came across a podcast series a good while ago that a group of Intuit engineers based in India had been running about life at Intuit.

It was amazing to hear these engineers talk about how empowered they felt to solve consumer problems at Intuit and how much they loved being able to experiment systematically in trying to do so.

I’d note that Intuit has been among India’s top 3 great places to work in each of the last 3 years, and it has no right to be there. It’s pretty much a U.S. firm: 92% of its revenue is in North America.

It ranked above Adobe, Cisco, and Salesforce, all of which have products in India that people can point their former classmates toward and show them their innovation wares living in the marketplace. Intuit only operates in a handful of countries, so it’s not a passport to all these exciting international cities where someone might want to work.

Nonetheless, there they are. To do large-scale M&A, you have to have an amazing culture. The ability to integrate new businesses has failed many very well-regarded companies.

Perhaps it makes sense to talk about capital allocation historically for the company. If I think back a decade ago, they exited a number of assets in the personal-finance space: Quicken, Rock Financial, which became Quicken Loans and is now public as a large company called Rocket Companies. What happened there?

The acquisition of Rock Financial takes us back to a point in time in the late 1990s. Sometimes eras can dictate capital allocation.

When you’re in the haze of the New Economy era and everything feels like the next adjacency could be the huge opportunity, companies in that type of era tend to be less focused on the core and accumulate more clutter without asking what problem they solve or what competitive advantage they bring to a given adjacency.

That was probably the way I would define Intuit under Bill Harris, who was the shortest-lived CEO by tenure. There was a view at the time about whether Quicken could be the front end of internet banking, and some banks believed it.

Wells Fargo wanted to do an exclusive agreement. E*TRADE wanted to sell itself to Intuit at the time because it was worried about losing distribution if that was going to be the future. That’s the lineage of Rock Financial being part of Intuit.

It went on to license the Quicken name for its loan products. Under the leadership of Brad Smith, around 2013, Intuit needed to come back to its core.

They divested a digital bank they had bought in 2007. They divested Quicken and Rock Financial 2 or 3 years after that. At that time, the pressing challenges for the business and its core were 3 things.

First, they needed to rewrite the code base to move QuickBooks from a desktop ecosystem to an online ecosystem. The first iteration of the code hadn’t worked, and it needed a full rewrite, which is a heavy lift.

Second, they could see all of these fledgling opportunities in Live, but they needed to test and iterate to stand those up. Third was international.

At the time, I think 4% or 5% of the company’s revenue came from international markets. When you look at a software company of this size that has the chops to solve problems that are global in nature, it was underserving international markets, where you could identify some of the competition as being less skilled at execution than Intuit and arguably less strong culturally as well.

Smith’s era was really about refocusing on the core and shedding some of the bloat. Even though Rocket has been a very successful standalone company since then, I think it was a valid decision for Intuit to refocus on the core.

I also think that getting out of the way of underwriting financial products has allowed Intuit, now that we sit here with the benefit of hindsight, to execute on the full opportunity for an ad-driven model at Credit Karma.

That’s a fantastic segue into the large acquisitions of Credit Karma and Mailchimp that have been made over the last couple of years. Presumably, investors are still making sense of those and how they fit into the value equation.

What was the impetus and the commercial imperative for making those acquisitions, and how are you thinking about what they mean for the business today?

At some level, the acquisition of Credit Karma is a back-to-the-future type of concept. If you read the speeches of Bill Campbell from the late 1990s, he was focused on whether Quicken could become an asset that delivered free personal-finance services to consumers, was automated, could get them the best deal, and was monetized by an ad-driven model.

With Credit Karma, when it really started to scale, that was finally the delivery of that vision: a company that had broken out in terms of its reach with consumers, with 100 million members and 40 million monthly active users, and potentially its frequency.

You can envisage lots of ways to get people to use Credit Karma more frequently, and I’ll touch on that in a second. The other thing that Intuit thought it could uniquely bring to Credit Karma was the synergy of the data.

Intuit knows an awful lot about consumers. It has verified income data—people generally don’t overstate how much they earn in a tax return. It knows if you’ve had various life events, if you’ve bought stocks or rental property for the first time, or if you’ve just gotten married or divorced.

There are a number of life events that inform the way we conduct our financial lives and leave artifacts in the tax return. Ultimately, I think what Intuit perceived was a huge opportunity to strengthen and deepen the data set at Credit Karma and make it vastly more valuable to its users.

I think that does a great job of explaining the Credit Karma acquisition. Mailchimp seems a lot less intuitive. How does that fit into the puzzle?

Imagine what we talked about earlier: software for small businesses to communicate with, manage, and grow their customer base, mainly through email and social campaigns.

If you recall how Intuit conceived of the opportunity in QuickBooks, it was because you had all this off-label use of Quicken by small businesses. It happened again here. Small businesses in the U.S. have, on some level, been trying to use QuickBooks as a CRM.

There are about 4 billion customer records stored in QuickBooks. Intuit readily admits that it is not a CRM, so I think that’s one basis for understanding the need to offer its consumers something more in this domain.

The second thing to underline is that the most important goal for small businesses is to find and retain customers. Bookkeeping is very much an afterthought.

When you think about the life cycle of a small business, it will be out there trying to find customers long before it’s filing an annual set of accounts or moving off some informal means of keeping its records.

The second vector here is that even if everyone ends up at QuickBooks in the end as their accounting software, they’ve generally made other choices about payroll, payments, and CRM long before that.

This is an opportunity for the QuickBooks family, including Mailchimp, to interact with customers at an early stage, before they’ve made payroll and payment decisions. That matters because those attached services are far larger TAMs than the one described by small-business accounting.

The third consideration is that Mailchimp has done a great job scaling internationally. Whereas QuickBooks is a rare example of a $120 billion software company with only 8% of revenue coming from international markets, Mailchimp’s split is more like 50/50.

They’ve done that virally. The company is one of these unusual examples of a private software company that was actually overearning. It was bootstrapped from inception, never took an outside penny of venture-capital funding, and had no stock-based compensation running through the company.

It has a product virality that can now be an outpost domestically and internationally, intercepting customers before they make other technology decisions. When you put the whole thing together, you have a suite that small businesses can run their business on and an earlier point of outreach from the Intuit family to small businesses.

That’s the funnel mechanism for customer acquisition.

I’d be remiss if I didn’t ask about potential risks with this business. It’s not one that lacks controversy, because if the tax code were simplified, the demand for its product would intuitively be lower.

I presume it’s in Intuit’s best interest that taxes remain complicated and scary. Is there anything they’ve been doing to stop the push toward pre-filled returns or a simplified tax code?

The company would describe the motion around tax simplification as having the opposite effect, at least at some level. Their thought process is that the reason 60% of Americans and 85% of tax-preparation dollars are stuck in assisted mechanisms is the complexity of the tax system.

More of those dollars would move toward solutions like do-it-yourself filing or Live if we had a dramatic simplification of the tax code. Then there’s the question of what the U.S. will ever manage to unpick in practice.

You have 50 different flavors of state tax and a myriad of different benefits and deductions encoded through the tax code. All of those would have to go away for a bipartisan bill to agree on the simplifications.

In reality, it’s only small components of the Republican Party that occasionally float the idea of radical tax simplification. The idea doesn’t seem to take flight in the center very often.

When we look at the idea of lobbying or what Intuit’s position might be, they point out that they are providing free filing to 8 million to 10 million Americans. They’ve spent the last several tax seasons getting rid of fees that apply at the lower end, including fees for uploading prior-year data and other types of services.

They have essentially gone fully free. Even if we imagined there were some political movement that wanted to convene free tax filing, Intuit has successfully competed against commercial offerings of free filing in the not-too-distant past. Credit Karma Tax is the example.

When I roll all of that up and combine it with the federal government having legislated not to enter the tax-preparation category, I feel better about the balance of the risks from a moat perspective.

This is a business that ostensibly should grow at GDP plus a couple of percentage points, but it has consistently been able to grow at a pace well in excess of GDP. What are the key drivers of that?

The summary would be that Intuit is selling the digitization of irritating necessities: filing taxes or keeping books. Nobody wakes up in the morning wanting to do those things, and the digital penetration of both is low.

Their share of U.S. tax dollars is in the mid-teens today, but they now have a Live product that is cheaper and more convenient than the brick-and-mortar alternative.

On the small-business side, they have 6 million businesses on their accounting products. It’s less than 10% penetrated when they look at the viable businesses that could benefit from a product like that.

On cash flow and payments, there are $2 trillion of invoices on Intuit’s rails, but their charge volume is only $120 billion, so there’s mid-single-digit penetration. Now they’re enabling those invoices for instant or early payment, and they can take that share higher.

Payroll is just an enormous market. They have the on-ramp of having that product work very well with QuickBooks. In many cases, companies set up their accounting platform very early in the company life cycle, and that’s simply a good port of call for choosing a payroll offering.

That market is enormous compared with Intuit’s overall revenue, let alone its small-business revenue. Over in Credit Karma, they only have mid-single-digit penetration of leads that get converted for those types of products online, and that can go much higher.

As you come back to each facet of the business, you still have very low levels of penetration and increasing value that the company can offer.

One thing Sasan Goodarzi has brought to bear is a suite of products that add more value at a higher price. I think this can do a couple of things.

If you look at TurboTax Live, that product is generally twice the price of a basic do-it-yourself filing. One reason people generally churn out of TurboTax at about 25% annual churn—which is going to sound high—is that some life event changes and they don’t know how to answer the question in the return.

Now you have Live. Not only is it a product that can hugely boost lifetime value through higher ARPU, but it can also make a massive dent in churn related to uncertainty or a lack of confidence.

On the QuickBooks side, they now have a product called QuickBooks Advanced. When you think about churn there, it’s about 20%. Half of that is simply the birth and death of small businesses, which is better for QuickBooks users than it is overall, but it’s still 10 points.

The rest is people outgrowing QuickBooks software. You move out of the 1-to-10-employee category and need to move to a more sophisticated program.

Frankly, customers kick and scream not to do it. There was a period in the run-up to Google’s IPO when they were begging Intuit to add more fields to QuickBooks because they didn’t want the inconvenience of switching.

Uber ran a multihundred-million-dollar business on the $70 version of QuickBooks. Customers generally don’t want to migrate to or move up to vastly more expensive mid-market software.

Intuit has now put in this product called QuickBooks Advanced. It’s 3 times the cost of the base QuickBooks, and it addresses what you might call involuntary churn. People are only moving out because they’ve slightly outgrown the product, but they haven’t grown to the degree where they need a NetSuite or Sage offering that could be dramatically more expensive.

So there’s the basic-level digitization, and then more recently, high-value products that solve customer problems and address some of the churn you’ve seen historically in QuickBooks and TurboTax Live.

Excellent job laying out the financial profile of the business, its founding history, and its corporate M&A story.

One question we love to finish these conversations on is this: As someone who has studied the business deeply from a financial perspective, what are some of the lessons investors can take away? Given the amount of competition in the financial-software space, what lessons can be borrowed from Intuit and applied by people building those businesses?

It’s become popular to laud software as a service as one of the best business models ever. I’m sympathetic to that argument, but I think it tends to get overstated when the product being sold is to IT procurement departments, whose actual job is to proactively vet and adopt new technologies.

At Intuit, there have been times—I spoke about the era of Brad Smith—when the code base wasn’t necessarily in the best health, but Intuit enjoyed time to react. There was a time when Xero had a slightly disruptive offering, and Intuit enjoyed time to react.

That reaction time is a function of the greater degree of monogamy you have when you’re ingrained into the workflow of a non-technologist. Those people don’t want to relearn or go up the learning curve of new software. They didn’t get into business to do accounting or mess around with accounting software.

That buys you reaction time. The jump ball of having to navigate some shift in technology paradigms for these types of companies tends to be every 10 years, not every 3 to 4.

The second thing is that when we speak about great business models, that’s really an abstraction. None of us get to invest in business models per se. What’s accessible is ownership stakes in companies, and those companies have to have teams of people that you trust to execute as the terrain changes.

You’re generally paying a premium through the S&P 500 to buy these types of businesses, and the goodness you extract really needs a longer time horizon. When you start thinking about long time horizons, you have to think about culture. That matters a ton over time.

The third observation is that many software businesses sound amazing when you layer on the various switching barriers and the high returns enjoyed by their customers. They sound like a great mousetrap that won’t see their own return on invested capital revert to the mean.

But I think where those returns leak away and seep back into the economy is through stock-based compensation that you have to pay to engineers and salespeople. That’s a fact of life for technology companies.

It’s possible to imagine that engineers can be more mission-driven and culture-oriented. Salespeople are more likely to be coin-operated, and I think it can be quite difficult to earn really good GAAP operating margins, high returns on invested capital, and a high proportion of free cash flow that actually accrues to owners over time if you have to pay a cohort of engineers and salespeople.

We’ve talked about Intuit as being among a class of self-service technology businesses that don’t have to employ salespeople and enjoy that sort of white-hot competition that takes place over in that market, especially recently.

Maybe the last one is for investors and operators. One thing I like about Intuit, and about discussing its history, is that I read somewhere that a good moat should be littered with the dead bodies of your competitors or failed competitors.

With Intuit, we can rehearse whether it’s Microsoft, Xero, or Credit Karma when it was a standalone tax offering. There are various companies that have tried and failed to encroach on Intuit’s market position and its moats.

There are a vast number of technology businesses out there today that trade at very rich multiples where ultimately the moat has not been tested.

For operators, as I study Intuit’s history, I come back to the question you asked me about how they ended up with Rock Financial under their ownership. That period in the late 1990s was when shiny objects were very abundant, and the company ultimately strayed from its core.

Sometimes companies and their underlying shareholders can view every adjacency as an opportunity for another profit pool. But customers don’t think in terms of adjacencies. They don’t think, “I’m filing my taxes through a do-it-yourself platform; maybe I’ll do do-it-yourself retirement planning.”

You can imagine adjacencies, but you really need to think in terms of customer problems. That’s one thing I think Intuit has done unbelievably well over time.