The End of Intuit's Vertical Business

With the sale earlier this month of Eclipse to Activant Solutions, only one piece remains of what looks like a completely failed strategy.

The Eclipse product never seemed to fit into the Intuit portfolio. It's a wholesale distribution package aimed more in the Microsoft Dynamics level market, with software prices typically in excess of $50,000.

Activant, which will pay $100 million in cash for the business, is one of a few private equity funded consolidators that has been making moves in the mid-market. One of their more notable acquisitions has been Prophet21, a product also aimed at the distribution space. Another such consolidator is Consona, which among many other brands owns Made2Manage and Onyx. Both Activant and Consona fly far under the radar when compared to Infor, but they are worth paying attention to.

This sale all but closes a chapter in Intuit's history. A few years ago Intuit embarked on an acquisition path aimed at providing customers who have outgrown QuickBooks the option of another Intuit product instead of moving to competitors like Great Plains or Sage. As his company began this up-market push in 2002 with vertical acquisitions, Intuit CEO Stephen Bennett commented that

"When we were just losing those customers to (rival) Great Plains Software, it was dumb. Now that Microsoft has bought Great Plains, it's really stupid for us to lose customers to Microsoft."

The stated goal at the time was to build a Vertical Business Management Solutions division into a $500M - $1B business with 30%+ operating margins by 2007-2008. To say they have missed the mark would be quite an understatement. The business unit significantly missed its guidance in FY03, delivering $94.8 million. In FY04 the vertical business grew 15% to $109 million. Following that result Intuit began selling off some of its acquired vertical businesses, and in FY05 ceased reporting a separate revenue result for verticals.

Why have they sold it now? Three reasons...

1. It's just not core to their strategy anymore. All but one of the vertical pieces has been divested at this point, some for losses. American Fundware was purchased for $26 million in 2002 and sold to Kintera for $11 million in 2005. Intuit acquired OMware, creator of the Master Builder construction management product, in 2001 for approximately $42 million. They sold it to Sage last year for less than $30 million. Blue Ocean (help desk and IT asset management software) was picked up for $177 million in late 2002 and sold for $200 million three years later. Intuit paid $85 million for Eclipse.

2. The business was not growing. When the MasterBuilder unit was sold to Sage an Intuit representative informed me that “the verticals aren't core” to the business any longer. However, unlike each of the divested vertical products the two remaining ones at that time, Eclipse and MRI (real estate and property management) where still showing growth and would apparently be kept so long as that growth continues. It seems that Eclipse may have become an anchor on Intuit's growth numbers. You can bet that the moment MRI (aka Intuit Real Estate Solutions) ceases to be accretive to Intuit’s growth rate, it too will be sold off.

3. Intuit has learned what it wanted about the distribution business. I maintain that at some point in this journey Intuit appears to have become less interested in building a mid-market business out of the acquired products, and more interested in leveraging the acquired IP into vertical flavors of QuickBooks Enterprise. That product is now available in Contractor, Nonprofit, and Wholesale & Distribution editions. The sale off of MRI may also coincide with a release of QuickBooks Enterprise Real Estate Edition.

Intuit started with hopes of leveraging its brand identity onto a collection of disparate products aimed at retaining its customers and even winning net new customers in the mid-market against Microsoft and Sage. It didn't quite work out that way. However, by applying the learning from this venture into verticalized flavors of its core product, Intuit has emerged with something much stronger. The customer add rate on QuickBooks Enterprise speaks for itself.

How would Google + Intuit change the market?

Nick Carr wrote a piece yesterday suggesting that Google should go out and acquire Intuit. He makes a good argument, though he misses a few points (like QuickBase).

I'll suggest another reason (from Intuit's perspective) the deal should happen. The QuickBooks business may be headed for some trouble. Not QuickBooks Enterprise, which at this point looks to be a phenomenal success, but the entry level stuff, the backbone of the QuickBooks business.

QuickBooks Enterprise is successful because it is filling a gap between tradition QuickBooks and mid-market packages like Dynamics. Intuit's original move up market was all about retaining customers that outgrew QuickBooks and moved to other vendors. They never felt so compelled to make this push as when Microsoft acquired Great Plains. In 2002 Intuit CEO Stephen Bennett commented.

"When we were just losing those customers to (rival) Great Plains Software, it was dumb. Now that Microsoft has bought Great Plains, it's really stupid for us to lose customers to Microsoft."

Intuit proceeded to go on an acquisition spree, picking up mid-market focused business solutions in an attempt to offer a growth path to its customers. This strategy proved to be an almost complete failure, and most of the acquire business has since been divested (American Fundware to Kintera, MasterBuilder to Sage, etc).QuickBooks Enterprise, on the other hand, has been a huge success, adding about 4,000 customers in Intuit's last quarter. The success of this product is one of a handful of reasons Sage's MAS 90/200 business has faltered.

But let's be clear, the primary driver of success for QBE is the constant stream of customers outgrowing the entry level products. They don't mind that they are not moving to a "real" mid-market solution. The ease of migration, familiarity of the UI, minimal training requirements, etc, make it a compelling option.Without this feeder system the product would not fair nearly as well. It would be just another functionally deficient solution fighting for space in a crowded market and winning deals on price and usability (simplicity), albeit backed by a strong corporate parent. Sort of like SAP Business One.

However, Intuit is once again losing a lot of customers to Microsoft - not the kind that outgrow QuickBooks and leave, but the kind that Intuit doesn't see in the first place because they are buying Microsoft Office Accounting. Yes, Intuit still reports capturing about 90% of the share of shrink wrapped accounting software sold at Staples, Best Buy, etc. But that statistic misses all the people like me that just go to Microsoft.com and download Office Accounting. The numbers make it clear what kind of impact this is having already.

There is a noticeable shift in the mix of QuickBooks customer adds over the last few quarters. While the Premier and Enterprise units continue to trend nicely up, adds on the entry level stuff (Simple Start, Basic, and Pro) are not as strong. Actually that is understating it quite a bit. Over the last 6 reported quarters customer add growth on entry level QuickBooks has been as follows: 34%, 30%, 14%, 4%, 2%, -8%.

The seamless experience of working in an accounting app that is basically part of my office productivity suite is huge, and Intuit cannot expect over time to hook into Microsoft Office as well. That comparison is a losing proposition for them. Today the market presents them with a number of alternatives to Office, from small start-ups like Zoho to a well funded player like Google.