Small business and tax software giant Intuit (NASDAQ:INTU) released fiscal second-quarter 2015 earnings on Thursday that exceeded its own guidance on both top-line revenue and net loss. The company reported revenue of $808 million, topping its estimated range of $780 million-$800 million and exceeding the prior-year quarter by 3.3%.
Intuit posted an operating loss of $98 million, an appreciably better result versus its guidance, which fell in the neighborhood of $120 million to $125 million. Net loss landed at $66 million, versus a prior year red-ink total of $37 million.
QuickBooks Online seizes more market share
To find the driver behind today's better-than-anticipated numbers, we can look to the continued aggressive expansion of the company's QuickBooks Online software, also known as "QBO." QuickBooks Online is Intuit's flagship small-business accounting product, a cloud-based platform that is gradually replacing the company's legacy desktop software.
In recent quarters, QBO subscribers have increased appreciably as the company converts its own desktop customers and markets to new users. In the second quarter, QBO added 100,000 subscribers -- a growth rate of 50%, which impressively topped last year's comparable growth rate of 43%.
The company also maintained its momentum in adding global QBO converts. Intuit was able to expand international users at a growth rate of 170%, to a total of 127,000 non-U.S. subscribers.
In a sign of confidence, management revised its total third-quarter QBO subscriber target guidance to 925,000. Hitting this number would represent a 10% sequential increase in QBO users over the quarter just concluded.
Creating new paths to growth
The image above may look familiar to users of QuickBooks Online, with its clean pie chart and color scheme, which seem to leap right out of the Intuit graphics palette. But if you peer closely enough, you'll see that the text is actually in Portuguese. The picture is from the home page of Brazilian small-business accounting company ZeroPaper, one of two companies Intuit acquired during the quarter to expand its QuickBooks Online ecosystem.
The ZeroPaper acquisition should be noteworthy for those who are contemplating taking or maintaining a long-term position in Intuit. With 108 million users, Brazil ranks fifth in the world in Internet usage by country. ZeroPaper offers a totally cloud-based accounting solution, and the company has racked up a massive 450,000 subscribers in the three short years since its launch in 2012.
Intuit's plan for ZeroPaper is to integrate the company's software into its own online platform, migrating as many subscribers as possible to QBO. With a customer pool in Brazil equal to half of its own total cloud-based accounting customer base, Intuit has many years of growth ahead in South America. More importantly, it's created a decent model -- of acquisition followed by subscriber migration -- that it can replicate in other countries. Thus, the company has a method that it can employ to juice QBO's organic growth going forward.
Why weren't results even better?
If QBO is growing so quickly, some investors may wonder why the company's results weren't even more significant than those reported. In part, a decline in QuickBooks desktop software revenue of 10% offset the cloud business results, as the company continued its strategy of gradually shifting its focus from the desktop to online delivery of services.
Timing differences from accounting changes enacted last quarter also dampened the company's overall performance. Intuit now recognizes revenue from small business and tax desktop software only as services are provided, generally during a period of three years. This is part of an effort to provide additional customer service to desktop users in order to transition the bulk of these customers to the cloud during the next few years with minimal subscription loss.
Fiscal Q2 2015 was the first quarter in which investors could see those future revenues building up in a significant manner, even if they're not recognized as current sales. Deferred revenue on the balance sheet increased dramatically from last quarter, from $563 million to $971 million, an increase of more than 72%.
An encouraging quarter
Despite Intuit's recent brief suspension of filing state returns via its TurboTax software due to fraud concerns, the Consumer Tax segment managed a crisp increase in revenue of more than 54%, to $213 million. Traditionally, next quarter -- the time during which the bulk of tax revenues are realized -- provides a boost to the bottom line. Intuit is projecting net profit for Q3 2015 of roughly $1.1 billion.
One last area to note is Intuit's improving cash flow: Through the first six months of the year, the organization has generated $247 million in operating cash flow versus $142 million in the prior year. Intuit attributes its higher cash generation to more predictable, recurring revenue streams. Much of this predictability stems from QuickBooks Online, which collects payments on a monthly basis from its subscribers.
Management intends to return some of this additional cash to shareholders, having declared a $0.25 dividend Thursday for Q3 2015, a 32% increase from last year. A rising dividend provides yet one more reason for Intuit shareholders to be pleased with the swelling subscriber base of QuickBooks Online.
Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Intuit. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.