Intuit’s business model transition continues as Q1 2015 beat out expectations

SUMMARY:

Intuit beat out revenue expectations in its Q1 2015 results as it’s transition to subscription based services continues

brad smith CEO intuit
Brad Smith – CEO Intuit

Intuit surprised the market by beating out expectations for Q1 2015. In the press release and during the earnings call, the company was keen to show off how the business model transition to subscription services is working and what this means both for the year in progress and the year ahead. Both shine a light on how Intuit is progressing.

By the numbers from the Intuit PR:

  • Delivered total company revenue of $672 million, up 8 percent, driven by the ongoing acceleration to the cloud.
  • Grew total QuickBooks Online subscribers by 43 percent to 739,000, up from 40 percent growth in the previous quarter.
  • Increased QuickBooks Online subscribers outside of the U.S. by more than 170 percent, to 103,000, further accelerating from last quarter.
  • Finished the fiscal quarter with cash and investments of $1.6 billion.

The company reiterated its position that accounting for desktop software is moving to a subscription basis which in turn will push approximately $400 million into deferred revenue for the current year.  On to some detailed color around small business:

  • Small business online ecosystem revenue grew 30 percent, with customer acquisition continuing to drive growth. QuickBooks desktop ecosystem revenue declined 2 percent, in line with expectations, as the focus continues to shift to QuickBooks Online.
  • QuickBooks total paying customers grew 22 percent.
  • Online payments charge volume grew 22 percent, driven by an increase in charge volume per customer.
  • Online payroll customers grew 24 percent, and full-service payroll customers nearly doubled.
  • Demandforce customers grew 27 percent.

Managing the transition

Intuit had a surprisingly good Q1 and overall it is easy to see a transition pattern emerging that is both understandable and relatively non-disruptive. That stands in stark contrast to others who have or are attempting the SaaS/cloud/subscription model transition. But let’s be clear. Intuit has a stranglehold on its home US market where its customers are very sticky and difficult to displace.

Having said that, Intuit has not made the classic mistake of assuming that threats don’t impact them and are clearly investing judiciously to ensure customers stay onside. This from remarks by Brad Smith, CEO:

In terms of the actual number of customers you can migrate now, our goal is to have as many as 70% by the end of this fiscal year. Right now it’s more in the neighborhood of about third – a third of the customers could move over. And what we are doing to close that gap is basically closing out the feature functionality things that they are used to having in desktop like advanced inventory, job costing, sales form customization.

We have a three clicks, three minutes conversion of your data from small business accounting. But at the same time we have to make that just as easy to move your payments and your payroll data.

Not that this transition comes without carefully managed pain. Again, in an answer on the balancing act between outright sales and switching to subscription, Smith said:

…net-net, it’s where we expected it to be 20% to 25% is where about we anticipated on the outright sales. We saw the migration moving to subscriptions and/or to the cloud version of the product, so we are right where we thought we would be in terms of the desktop performance.

In short, Intuit balanced a drop off of 20-25% with a significant uptick in subscription adds. That requires pristine execution and here, Intuit has now demonstrated several quarters of walking through its own pain but without enduring shocks to the system.

Growth and competition

Now comes the question – growth in overseas markets where Intuit has traditionally been either weak or struggled. Smith is a lot more confident today. In talking about the payments opportunity, he said:

One out of two small businesses are accepting credit and debit cards today. We had single digit penetration as we move to the cloud we think it’s a real opportunity for us to really increase that penetration.

What about the competition? Earlier in the week, AccountingWeb’s John Stokdyk provided color on the global cloud accounting market offering this analysis:

Xero is credited with leading the cloud accounting marketing charge around the world, but in an analysis on the eve of the Solutions 14 conference in Las Vegas, DigitalFirst.com’s Sholto Macpherson explained why Xero won’t take the US in a hurry. With US customer acquisition halving to 4,000 a month, Xero’s share price fell back from NZ$45 to NZ$18 in October. The scale of the US challenge is immense: Intuit makes around US$850m in profits on a turnover of $4bn each year, while Xero has reserves of US$150m and is burning through about US$15m a quarter in its efforts to crack North America.

“The blitzkrieg 2.0 ain’t going to happen,” wrote Macpherson. This is going to be an expensive, long-term siege “with no guarantees that Xero will threaten Intuit’s hold long term”.

David v Goliath anyone? Yes and no. While Intuit unquestionably dominates the US market, it is not invincible. There are plenty of one person businesses that Xero could pick off. But as Intuit is working towards functional parity with solutions that are already familiar, then it becomes much more difficult to persuade that all important accounting influencer that the Xero mousetrap is better than the Intuit offering. Add in the fact that Intuit can easily outgun Xero in marketing and you can understand why Macpherson arrived at his conclusions. Xero can turn its attention to the Sage installed base where it has had success but that still doesn’t get it past the bigger foe.

My take

A few years ago I would have been highly skeptical of Intuit’s ability to successfully transition without hitting speed bumps. The good news is that management has recognized the clear need to not just forlklift to a new model but re-engineer in a purposeful manner so that customers see clear comparative benefit. That is a well thought out defensive strategy for which they should be applauded.

More to the point, the Intuit team are laser focused on execution and for this market that matters. Not for Intuit the sloppy position taken by other vendors that have mistakenly assumed they cannot be beaten.

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