Intuit (NASDAQ:INTU) reported a first-quarter 2015 loss of $84 million on Thursday, on revenue of $672 million. The quarter's GAAP operating loss came in at $114 million. The Mountain View-based accounting and tax software giant substantially outperformed its own guidance on top-line revenue, which was projected to fall between $620-$630 million, and its operating loss, which was pegged between $155 -$160 million. Below, we review the earnings report, and the key drivers behind Intuit's successful quarter.
Context for strong performance: the great flip
In August, Intuit announced that it would pour resources into growing its "Small Business Online Ecosystem," which is propelled by the company's flagship cloud-based accounting service, QuickBooks Online, or QBO. Intuit made much of the fact that, for the first time, in Q4 2014, the company acquired more users on its online platforms than on its legacy desktop products.
If anything, Intuit underplayed this statistic. As you can see from the following slide, new online users in Q4 not only outpaced new desktop customers, but the percentages essentially flipped from the previous quarter:
The trend shows that online users are headed toward the 70% total future user base that desktop users comprised just two years ago.
It's likely that this mirror image reversal was a catalyst in Intuit's decision to accelerate adoption of cloud-based products like QuickBooks Online. The result in Q1 of 2015 was significant: QBO subscribers increased by 43% versus the previous year's quarter, bringing total subscribers to 739,000. In its push to maintain significant share in the global cloud-based accounting market, Intuit enlarged its non-U.S. QBO user base by a torrid 170% versus the prior year, reaching 103,000 subscribers.
Accounting changes begin, but have a small effect on the quarter
Last quarter, the company announced that it would begin accounting for desktop versions of its small business products via deferred revenue. As Intuit collects cash from small business customers, it will record a liability on its books equal to the amount of software purchases.
Intuit is making this accounting change because it's doubling down on service and support for desktop customers. It will be more appropriate to recognize revenue when these services are performed rather than upfront, as has been the current process. This may sound like the opposite of the company's strategy to accelerate cloud-based services, but the attention paid to desktop customers is meant to ensure that these important constituents remain happy and engaged until Intuit can migrate them over to the cloud.
Revenue for typical desktop sales will be recognized over periods ranging from one to three years. While deferred revenue did not exactly balloon in this first quarter, the impact to the balance sheet is underway, with total deferred revenue increasing roughly 5%, and long-term deferred revenue jumping from $10 million in Q4 2014 to $52 million in Q1 2015.
Annualized recurring revenue is a key metric to watch going forward
Part of the rationale for the shift to deferred revenue accounting on desktop services is management's growing conviction regarding the power of predictable monthly subscription revenue. Predictable revenue empowers a company to take more calculated risks to grow, while also providing rewards for continued investment in current revenue sources. As owners in Intuit's future revenue streams, shareholders should pay attention to the company's "annualized recurring revenue," or ARR, metric.
ARR is simply Intuit's online platforms revenue for the most recent quarter, multiplied by four. This number gives investors a sense of how much revenue, on an annualized basis, Intuit considers a lock from its loyal subscriber base. The company reported ARR at $680 million as of Q1 2015. The metric will grow each quarter as a function of new global online services subscribers and desktop customer migration to online services.
Going forward, we'll report on ARR in its relation to total revenue. In this quarter, ARR equaled 16% of total year projected revenue of roughly $4.3 billion. Put simply, the company considers 16% of its total revenue as already built in for the next fiscal year. As George and Ira Gershwin wrote: "Nice work if you can get it!"
Tax revenue tea leaves
Within Intuit's other major segment, tax software and services, growth was also robust. The Consumer Tax division expanded revenue by 36% over the prior year quarter, and Professional Tax grew by 46%. As the company is quick to point out, the first quarter of its fiscal year, which ends on October 31, is not a heavy quarter for tax, and revenues during this period represent a fraction of what will be booked during the next two quarters.
However, investors can hazard a guess that the second and third quarters may also show strength, as this period's growth may indicate robust tax planning activity among both consumers and professional tax preparers. In the accounting profession, this is often a clue to a busy tax season ahead.
A final point: It's time to replenish the balance sheet
In the last fiscal year, Intuit put serious cash to work for shareholders, repurchasing $1.6 billion worth of shares on the open market, and issuing $220 million in dividends. It's also started to invest in a more focused fashion in online services, as discussed above. The effects of these shareholder returns and investments are beginning to show on the balance sheet, as cash has decreased from $849 million last quarter to $542 million at the end of Q1 2015
In the next two quarters, particularly Q3, the height of tax season, Intuit traditionally makes much of its annual hay. Shareholders may want to watch the corporate coffers to ensure that the company doesn't overextend on its capital expenditure and share repurchases during and after this period. It's reasonable to expect that management will let some cash flow back into its checking accounts in Q2 and Q3, after five consecutive active quarters of investment and shareholder returns.