Intuit, Inc. Pushes Smart Growth, Market Yawns

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Most everyday citizens know Intuit (NASDAQ: INTU  ) from its popular TurboTax service or its personal finance site, Mint.com. But the company also helps small- to medium-sized businesses throughout the U.S. and -- increasingly -- the world help balance their accounting books through its Quicken products.

Source: Intuit.

Because tax season is behind us, the main focus for now is on this small business segment.

In that respect, Intuit reported earnings that provided proof the company remains focused on what we think are its highest priorities. The market, however, wasn't too crazy that revenue numbers might shrink over the next year. Shares are currently trading down about 3%. Dig a little deeper, however, and it's actually not a bad thing at all.

"We're fully committed to winning the cloud." 
That's what CEO Brad Smith had to say in his opening remarks, and it highlights the most critical initiative for the company moving forward. Historically, Intuit's accounting and payroll solutions have been desktop offerings with one point-of-sale.

The company is making the transition to the cloud for QuickBooks. That's imperative for two big reasons: First, the cloud is more convenient for end-users. But more importantly, a cloud subscription to Intuit's Quicken products means a stable, recurring revenue stream for the company, and it makes its offerings even stickier.

These cloud solutions are catching on with customers, too. This past quarter was the first time there were more new subscribers to QuickBooks Online than QuickBooks Desktop. The company sees this trend as one that will only pick up steam moving forward. As a result, it is changing how it recognizes revenue.

That change will mean QuickBooks Desktop revenue will be recognized over time instead of as a one-time licensing fee. That will make it appear like revenue is falling by 4% next year, when in actuality, the company expects to grow revenue by 5%-8%. 

Gaining traction with small businesses
Instead of raising prices on its cloud offerings, Intuit is fully committed to gaining as many new customers as it can right now. QuickBooks is rapidly become an integral part of any business's record-keeping, and that means it is a very sticky product. Raising the subscription fee -- and therefore profits -- can come later, after Intuit has gained as much market share as it thinks it can.

Over the past quarter, Intuit grew revenue by 13%, while earnings were slightly negative on a non-GAAP basis. Within the Small Business segment, there were a number of noteworthy highlights:

  • QuickBooks Online subscribers grew by 40% to roughly 150,000 customers.
  • International QuickBooks Online subscribers grew 150% to 84,000.
  • The Small Business Online Ecosystem increased its annualized recurring revenue by a very healthy 34%.
  • Online payroll subscribers -- an add-on offering from QuickBooks Online -- grew 25%.

The company also provided guidance for where it hopes to be by 2017 -- which is helpful since 2015's revenue numbers will appear out of whack.

Intuit expects revenue to grow by 9% annually, while non-GAAP earnings increase at an average 13% clip, resulting in $5 non-GAAP EPS. More importantly, it expects QuickBooks Online customers to grow at a 40% annualized rate and end 2017 with over 2 million subscribers.

What it all means
Earlier this month, Stock Advisor analyst Brendan Mathews published a report on eight things we hope to see from Intuit moving forward. During the conference call, there were signs of significant progress being made on three of those fronts.

While that might sound small, many of the metrics Brendan was looking for have to do with TurboTax, which wasn't significantly addressed in this report.

Those three things were:

  1. Management increases its dividend: Intuit announced it was raising its dividend by 32% to a $1.00 annual payout.
  2. QuickBooks makes the transition from a licensed product to a subscription service: As described above, the company is investing heavily in its cloud service. While that means QuickBooks Desktop units will fall (which they did during the last quarter), long-term subscription revenues should offset and eclipse these losses.
  3. Customers take up payroll and/or payment services: Payroll service subscribers grew 25% and are now being used by 19% of QuickBooks Online Users. Payment services also grew, as 5% of Online subscribers were using the product, up from 3% last year.

Moving forward, investors need to be mindful of how revenue numbers will be skewed for the next 12 months. The two most important metrics to watch will be the growth of TurboTax users during next year's tax season, and the overall growth of revenue from the QuickBooks Online Ecosystem.

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