TurboTax Lost 1 Million Free Customers After IRS Direct File Option; Intuit shares plummet

Intuit Inc. shares fell the most in more than 18 months after the company reported losing 1 million customers who use its TurboTax service for free, stoking concerns about demand for the software.

Ten million people used TurboTax for free this year to file their taxes, a drop of about 1 million from the previous year, the Mountain View, California-based software developer said. It also lost market share among low-paying customers.

Shares fell as much as 9.3% to $600.49 on Friday in New York, the biggest intraday drop since November 2022. The stock had gained 6% this year through Thursday’s close.

Intuit has been working to offer its TurboTax software to those with more complicated tax situations, betting on the idea that those customers in particular could use expert online assistance. The company has also marketed more AI features in its products.

Despite the loss of free customers, there are signs that Intuit’s investments are paying off. According to the company, the average TurboTax user is spending 10% more filing this year compared to a year ago. Fiscal third-quarter revenue rose 12% to $6.74 billion, beating the $6.64 billion average analyst estimates.

The period ending April 30 — including tax season — is the most critical for the maker of TurboTax and other financial software. Earnings, excluding some items, were $9.88 per share, beating Wall Street expectations.

During an earnings conference call after the results were released, company executives were asked about the cause and implications of the decline in users. Morgan Stanley analyst Keith Weiss asked why Intuit can’t use TurboTax to appeal to both the high and low end of the market.

Competition for free and lower-paying customers raises “questions that could worry investors,” wrote Raimo Lenschow, an analyst at Barclays.

CEO Sasan Goodarzi downplayed the free customer base. Some people “are really just looking for free, platform-hopping tax software, and we’re not interested in chasing those customers,” he said. Goodarzi also noted that TurboTax has gained share among people who have traditionally hired an accountant to handle their tax returns.

Some of those outgoing customers may have opted for a free tax software pilot program administered by the Internal Revenue Service that was available in a limited number of states this tax season and used by about 140,000 people. Intuit has long lobbied against government efforts to offer software for people to complete their tax returns online, calling it unnecessary because private companies already offer it for free.

Intuit does not consider the government’s free tax filing pilot to be a contributing factor to the decline, a spokesperson said.

Investors may also have wanted to see stronger results from Intuit’s business-oriented products, such as QuickBooks Accounting, said Niraj Patel, an analyst at Bloomberg Intelligence. Sales of the unit containing QuickBooks, which is aimed at small businesses and self-employed users, rose 18% to $2.4 billion, roughly in line with average estimates.

For the current quarter, total revenue will be approximately $3.1 billion, above analyst estimates. Earnings, excluding some items, will be between $1.80 and $1.85 per share in the period ending in July, also beating Wall Street’s outlook.

The company separately announced that Credit Karma CEO Kenneth Lin will leave the company at the end of this year. That could indicate more disruption, Patel said.

Credit Karma is a loan aggregation service acquired by Intuit in 2020. Joe Kauffman, president of the unit, will replace Lin effective Aug. 1, the company said. Intuit is currently working to steer customers of Mint, a financial management app acquired in 2009 and recently closed, toward Credit Karma. The company now expects Credit Karma sales to rise about 2% to $1.66 billion for the full year, versus a previous outlook of roughly flat revenue.

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