A Taxing Time for Intuit

Shares of Intuit (INTU Quote) fell Thursday after AOL Time Warner (AOL Quote) switched to H&R Block(HRB Quote) as its primary online tax service and new numbers showed slowing growth of the company's TurboTax software.

Intuit shares closed today down $3.12, or 7.6%, to $37.76.

Data released earlier this week by Port Washington, N.Y.-based NPDTechworld, whose software transaction research covers 84% of the retail market, showed that Intuit TurboTax sales growth has slowed in recent weeks. Two Wall Street analysts on Wednesday pointed to those numbers but said Intuit sales remain strong.

"We currently are in a weak streak, but we are confident conditions will pick up eventually," David Farina, an analyst with William Blair, said in his research note. Farina has a strong buy rating on Intuit, and his company has done banking for Intuit within the past three years.

TurboTax sales totaled $12.6 million in the week beginning Jan. 20, which was a 33.8% increase over the same period a year ago. The following week, however, sales came in 26% higher than the period a year earlier, and that year-over-year percentage growth continued to fall in subsequent weeks. In the week starting Feb. 17, sales came in only 9.8% higher than a year earlier.

Overall tax software sales growth also has slowed since Jan. 20. The trends reflect the seasonality of the tax season, Farina said. He noted that overachievers rush out to buy tax software in the last week of January after they've received their W-2s and then last-minute filers create another boost in tax software sales from mid-March to April 10.

H&R Block Sales Blooming

However, H&R Block bucked that trend. The company's software sales grew 40.1% in the week starting Feb. 17 compared with a year earlier. That was up from a 32.8% increase a week earlier.

Farina said those numbers could reflect rebate programs that H&R Block typically runs for a few weeks every tax season, which essentially result in the company offering its software for free. He said Block's unit market share has not materially changed this year, despite the rebates.

H&R Block also recently scored two other wins against Intuit. On Wednesday, the company said it will replace Intuit as the primary tax preparer on America Online and Wall Street Journal writer Walter S. Mossberg recommended H&R Block's TaxCut over TurboTax, noting that it costs $10 less.

But AOL was not as big a loss as the market seems to think, Farina said. "I think it's highly immaterial. It has not been a very successful channel for Intuit," said Farina, noting that Intuit recently signed a deal to become the exclusive tax provider on Yahoo! (YHOO Quote) instead. "AOL charged a lot of money for the slotting fees."

And Farina discounted the WSJ article, suggesting Mossberg has a bigger influence on Wall Street investors than on tax software customers.

The analyst noted that the NPDTechworld numbers may be low because they don't include online direct sales of TurboTax, which has become an increasingly popular way for customers to buy the software. "We are beginning to believe that online tax is on the margin cannibalizing sales from retail TurboTax," Farina said in his note. But selling direct online is better for Intuit because it eliminates the costs of packaging and the retailers' cut, he said.

Michael Wallace, an analyst at UBS Warburg, also pointed to the growing strength of online sales, in a note released Thursday. "We also think Web TurboTax and e-filing trends are growing stronger, which could provide upside to our tax estimates," said Wallace, who called sales trends for Intuit's core retail products "solid."

Wallace maintains a hold on Intuit because the stock traditionally trades off after February. His company does not have a banking relationship with Intuit.