Good read on the business and current challenges - The Xero Story (a 2023 update) - find the moat

Some more bad publicity on Intuit (competitor) in the US

Nine years ago, ProPublica reported on how for-profit tax-preparation software companies, such as Intuit, the maker of TurboTax, had successfully lobbied to stop the IRS from creating an easy way for millions of taxpayers to file online for free (something many other countries provide). Instead, the IRS struck a deal with these companies to offer their products for free to qualifying taxpayers, while the government pledged not to create its own competing system.

In 2019, as Intuit was lobbying Congress to make this agreement permanent, ProPublica exposed how TurboTax was using deceptive design and misleading tactics to steer low-income filers to paid versions of its service when they were eligible to file for free. This tactic worked. Only a tiny percentage of eligible taxpayers actually used the free products.

Our investigation spurred public outcry, federal and state investigations, lawsuits and more. The IRS announced major reforms to its agreement with the tax-prep software industry, including new policies that allow citizens to file their taxes for free directly with the IRS. And this summer, the recently passed Inflation Reduction Act included $15 million for the IRS to study free tax filing options. This is a critical step toward a public filing option for all Americans.

This entire investigation represents how powerful and wide-reaching journalism can be when published in the public interest. And with the public’s support, we’re able to really dig deep and uncover practices that corporations would much rather remain hidden. 

Was interested to hear Ben's view on XRO - Ben's stock picks to buy, hold, or sell? on ausbiz

The key point being the government mandate to force SMEs to move online in the UK (MTD Making Tax Digital) - Overview of Making Tax Digital - GOV.UK (www.gov.uk) which will be a driver over the next 12 months. UK market is needed for growth given the more challenging US market.

Xero has a landing page for it - Making Tax Digital - Everything You Need To Know | Xero UK

In a follow up to the increased cometition for XRO I was interested to see Intuit highlighted in The Bear Cave Newsletter - I'm not a subscriber so can't read it all but excerpt below:

Intuit (NASDAQ: INTU — $109 billion) is a financial software company that targets individuals and small businesses with a suite of products including TurboTax, QuickBooks, Credit Karma, and Mailchimp. The Bear Cave believes Intuit owns a collection of second-tier assets that have systematically taken advantage of customers and gone to the edge of the law. Now, with goodwill across the Intuit ecosystem stretched thin, the company may suffer the consequences of years of predatory behavior.

For an example of Intuit’s aggressive practices let’s first look at Credit Karma, which Intuit acquired in December 2020 for $8.1 billion. Credit Karma offers its 100 million+ visitors free recommendations on loans and credit cards and makes a commission when consumers use its affiliate links. When closing the acquisition, Intuit said the combination “will make it simple for consumers to make better decisions with their money and take control of their financial lives.”

Not everyone agrees.

According to one February 2022 consumer complaint filed with the Texas Attorney General, obtained by The Bear Cave through a FOIA request, a distressed customer wrote,

“My elderly father has been involved in at least 4 online romance scams… I found out that my elderly father took out 2 personal loans through Credit Karma to give to said scammers. The first loan is with Upstart for $9,000, interest rate 28.88%, for 5 years. The second loan is with Personify for $4,000, interest rate of 81.5% for 3 years… I can’t understand how an 81.5% loan is legal. My elderly father is over 70 years old and his only income is social security.”

(February 2022 Complaint Against Credit Karma to the Texas Attorney General, obtained via FOIA)

Personify is listed as number one on a Credit Karma blog post titled “best personal loans for bad credit in 2022.” Second on Credit Karma’s list of the best lenders for bad credit is Oportun Financial Corp (NASDAQ: OPRT — $151 million), which is good “if you’re looking to build credit from scratch.” Oportun Financial was investigated by the CFPB after it “sued thousands of low-income Latinos during the pandemic” and was recently fined for “a faulty algorithm that caused overdrafts and overdraft penalties for customers.”

Oportun Financial’s CEO, Raul Vazquez, also serves on Intuit’s board and audit committee. In addition, Intuit’s former CFO, R. Neil Williams, serves on the board of Oportun, which has fallen ~70% since its September 2019 IPO. Intuit classifies Mr. Vazquez as an “independent” board member.

Credit Karma’s website says it is devoted to “championing financial progress for all” and the company’s mission is “to empower each and every one of our members with the tools they need to turn their financial dreams into a reality.” Those claims are beginning to receive more scrutiny. In September, Credit Karma settled with the FTC for “tricking consumers with allegedly false ‘pre-approved’ credit offers.” The FTC announcement reads, in part,

“Credit Karma falsely told many consumers that they had been ‘pre-approved’ for credit offers, leading consumers to apply, incur a hard inquiry on their credit reports, and, if they are denied, potentially damage their credit scores unnecessarily.”

An FTC blog announcement for the settlement has over 1,000 comments, including one that reads,

“My mouth dropped when I read about this lawsuit. I always thought it was odd how my approval ratings were great but would still get denied. I would make excuses in my mind to make it make sense. I’m glad someone brought light to this situation because it affects people in more ways than people can imagine.”

As part of the September 2022 settlement, Credit Karma “will also have to stop deceiving consumers about credit offer approvals, which will be documented by an order requiring Credit Karma to preserve records of its marketing efforts.”

Credit Karma has also faced swift industry headwinds since Intuit’s acquisition. Its competitor NerdWallet (NASDAQ: NRDS) is down ~60% since its November 2021 IPO and on Tuesday Credit Karma announced a hiring freeze amid “revenue challenges.”

Intuit’s aggressive and allegedly illegal practices also extend to its crown jewel, TurboTax...

XRO is often quoted as one of the highest quality companies on the ASX and has been sold off aggressivley (albeit still on nearly 10x revenue).

It is trying to build a global presence as strong as it has in Australia/NZ. It appears it is doing well against Sage in the UK but struggling against Intuit in the US. The recent sell off has probably been worsened by UK's current economic woes.

Interestingly Intuit has now set its focus internationally (recent investor day) stating it will be targeting the Canada/UK and Australia as priorities. Essentially XRO's turf - the next few years might be decisive. I doubt it is a winner take all market with MYOB/Reckon etc in the Australian market still but XRO might be facing its first real compeition. I have seen it said that due to the different tax system XRO does better in Commonwealth countries than in the US but have no idea if this is true.

Intuit aquired MailChimp, and will likely use this as an 'in' with many SMEs as it is widely used in Australia. That said I think accountants also have a lot of sway here as to what software they prefer or recommend to clients.

Any case the landscape might begin to change especially if XRO faces a renewed competitor in the UK and then must fend of Intuit here (Quickbooks use to be common in Australia I believe when it was distriuited by Reckon). The accountants here probably have a better understanding of the software landscape.

Intuit Inc. - Intuit Investor Day 2022

Intuit-Investor-Day-2022_092822_For-Upload_SHIPPED.pdf (q4cdn.com)