Insights

As we have highlighted in our previous articles, we look to own high-quality businesses with good solid moats in our core equity strategies. The strong competitive advantages of our businesses allow them to generate superior profitability and returns on capital that are well above the cost of capital.

By their very nature, such competitive advantages are tough to build. Once built, it is similarly hard to dislodge. However, the superior return on capital earned by such businesses serves to attract competition. It means that the managers of these businesses have to persistently look for ways to expand their competitive advantages. This is why we look for businesses that have a healthy organizational culture, prioritize innovation, and treat their customers well.

Intuit is one business that satisfies our criteria of having built a solid moat. It had two primary businesses, small business accounting software – QuickBooks, and do-it-yourself tax filing software – TurboTax. It is the most dominant player in both businesses in the US. The competitive advantage in the business emanated from the time required to learn a new software/tax interface and/or integration costs to be incurred by the customer in switching to a competitive offering.

However, as we evaluated the business, we found ourselves dissatisfied with its business practices. It seemed to us that the company resorted to marketing practices that don’t place the customers’ best interest at its heart.

In the TurboTax business, revenues grew at a CAGR of 5% between 2013 and 2016, with growth picking up meaningfully between 2017 to 2022, wherein revenues grew at a CAGR of 13%. While you would expect such a growth step up to be associated with happy customers, the converse seems to have been true with allegations of aggressive marketing practices. It has been alleged that while the company introduced free offerings, it used deceptive practices to avoid customers using such offerings and directed them to paid offerings instead. Such practices give rise to the possibility of unfair customer treatment by engaging in bait-and-switch tactics.

In the QuickBooks business, cloud-based offerings from competitors like Xero have been relatively simpler and easier to use with lower pricing than QuickBooks. As the company tried to stem customer attrition, there have been reports of increased instances of customer grievances regarding the non-cancellation of subscriptions and/or continuing charges despite cancellations.

In the recent past, the company has made two meaningful acquisitions, namely Credit Karma and Mailchimp. Interestingly, both these businesses also are characterized by relatively poor business practices.

Credit Karma is a credit monitoring company that connects financial lenders to qualified borrowers/customers for credit card issuances, personal loan funding, etc. It earns a referral fee in the process from the lenders.

• • • The business was the subject of a Federal Trade Commission (FTC) investigation for its practices of deceiving consumers about credit offer approvals. The FTC investigation found that the company advertised third-party credit offers to Credit Karma members as “pre-approved”. However, the lenders had not pre-approved the credit offers. Nearly one-third of the customers were denied the advertised credit, negatively impacting the credit scores of those customers.
  • • Additionally, a number of lending partners listed on its platform were increasingly originating loans at extremely high interest rates that could only be characterized as predatory lending.

Mailchimp is a marketing automation platform and email marketing service used by businesses to manage their mailing lists and create email marketing campaigns to send to their customers.

• • • Intuit acquired Mailchimp at a very high valuation paying a multiple of 15x the business’s sales. At the time of the acquisition, Intuit noted that it would invest aggressively in the business to drive growth. In its efforts to increase Mailchimp’s revenues, the company raised the price of its services. To force customers to switch to higher price plans, features were removed from previous pricing tiers and moved to higher-priced plans.

When viewed in isolation, most of these practices point to more minor issues or issues limited to a specific business area. The company says as much as well. For example, regarding the Credit Karma pre-approved credit investigation by the FTC, which led to the company being fined, it stated that these were concerning a small subset of credit and personal loans. However, when looked at together, they point towards a pattern of unfair treatment of customers and a focus on squeezing the customer to pay more.

While Intuit has built a strong competitive advantage around its offerings, we find ourselves unconvinced about the quality of its culture and business practices.