Despite the CEO continuing to declare that Intuit will return to "double digit revenue growth" across all segments of the company, I am really having difficulty seeing how that is going to happen. Every segment seems to be struggling and I really do not think the economy is that big of a factor. Additionally, the acquisition of Digital Insight seems to be another bust, which seems to be the standard for most of their acquisitions.
The last quarter that Digital Insight reported prior to the acquisition had 16% growth, which seemed to be about the norm for it as a stand-alone business. From what I can tell from their "fact sheet", Intuit had a small "IFID" business that was on track to deliver $30M of revenue when Digital Insight was acquired. That business was growing around 30% when Digital Insight was acquired.
Because Intuit is not on a calendar quarter, trying to get a good baseline revenue number for the combined "IFID" is difficult. The closest I can get is by taking Digital Insight's 2005 Q3 & Q4 and 2006 Q1 & Q2 to get an equivalent Digital Insight revenue for Intuit's FY 2006. That results in $230M. If we grow that at 15%, we would expect that Digital Insight as a stand-alone entity would have delivered around $265M of revenue for Intuit's FY 2007. Combine that with the $30M of existing “IFID” revenue and the total would have been $295M for FY 2007.
With all that as background, I am trying to figure out how IFID's FY 2008 and FY 2009 revenue can be only $298.5M and $311M, respectively. That would imply a two-year CAGR of 3%. My figures may be off a bit, but the reported growth for FY 2009 is only 4% so the growth is obviously very low.
I want to know how Intuit can spend $1.5B to acquire a business that is growing at 15%-17% merge it with a business that is growing 25%-30% and come up with a business that is now growing 4%. Either the due diligence was bad and Intuit bought a business that was imploding or management has destroyed the business since the acquisition. I am sure most of the existing management team at Digital Insight cashed out and left, but that happens in almost every acquisition and should be accounted for in due diligence.
In light of all this, I am baffled at how they just guided to 6%-10% growth for IFID and how they can continue to claim that the rest of their segments can return to "double digit growth". What is going to change that will double the growth rate. At least with Turbo Tax and Quickbooks, they are victims are their own success. Those segments have such good products and their market share is so high that growth is difficult. I hear them talk about converting "non-consumption", but their current growth speaks to how difficult that is. As far as the economy driving lower growth, I think that is a scapegoat. Growth was slow before the economy slowed and I do not think a slow economy has that much of a negative impact on tax return filings and may actually have a positive impact since people who paid for professionals may decide to try and do it themselves to save money. Also, unless the banks that are failing are Intuit customers, I do not see how that would impact revenue since they get paid for end user activity.
I would love to hear other thoughts on revenue growth potential and the future of IFID.
I agree with many points you make, but I think the stock may still have room to run. The company generates enormous amounts of free cash flow ($650M after capital expenditures last year). Even if the topline growth continues to be low, their model has enough leverage that the bottom line will have somewhat higher growth. Even at a low growth rate, the discounted value of their free cash flows justifies a higher value than they currently have.
As far as IFID, I agree that either Intuit paid way too much for Digital Insight or they have destroyed the business. It might be that they are suffering from slowing end user adoption that no one saw coming, but that is what due diligence is for.