Intuit is focused on migrating customers from its legacy desktop QuickBooks Pro product to its cloud-based QuickBooks Online software.
Intuit showed every sign of leaving its self-described "transition year" of 2015 behind with its first-quarter 2016 earnings report released Thursday. The company booked a 17% rise in revenue, to $713 million, well above its own guided range of $660 million to $680 million. Intuit also posted an operating loss of only $29 million, against management's forecast of a $95 million to $100 million loss.
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Both revenue and the lower-than-expected operating loss benefited from an accounting change Intuit made in Q1 2015, in which it began to recognize some of its small-business software revenue ratably (i.e., spread out over equal periods) over one to three years. Intuit made the change to better match revenue to the timing of software services it provides.
Online subscriptions remain surprisingly robustIf you could single out one bit of information that captured the surprise factor behind Intuit's results, and the stock's subsequent gain of nearly 6% on Friday, it would be the number 57. That's the percentage increase by which the QuickBooks Online, or QBO, subscriber base grew in the first quarter of 2016.
This figure is also the exact total percentage increase of QBO customers in fiscal 2015. The subscriber base at the end of Q1 2016 now stands at 1.2 million.
Theoretically, as the QBO user base begins to hit a critical mass, the rate of growth should naturally decline a bit. That Q1 2016 subscriber additions kept 2015's heated pace is impressive.
QBO's U.S. subscribers' quarterly growth rate of 48% continued a trend well above its three-year compounded annual growth rate, or CAGR, of 34%, which management highlighted recently at Intuit's investor day conference in September.
Non-U.S. subscriptions also managed a supple increase, rising 109% from the prior year. However, this represents a deceleration from the last several quarters. For example, last quarter, non-U.S. subscriptions rose 170%. Q1 2016's subscriber additions are also below the three-year CAGR of 124% for this subset of total QBO subscribers.
Look for Inuit to try to boost the non-U.S. numbers later this year, as this market may contain the most fertile soil for Intuit's small-business ecosystem. As CEO Brad Smith pointed out during the company's earnings conference call on Thursday, "QuickBooks Online has very low penetration, when you consider our total addressable market of more than 65 million small businesses in our prioritized countries."
A massive share buybackIntuit delved deep into its balance sheet resources in Q1 2016 to accomplish a massive share repurchase relative to the company's size.Management liquidated all of Intuit's nearly $900 million in short-term investments, tapped into another $350 million via a short-term credit facility, and threw in a bit of cash on hand, to repurchase $1.3 billion worth of its own shares on the public markets.
The fewer shares outstanding will help boost earnings per share this year, and indeed, Intuit raised its full-year diluted EPS guidance from between $2.50 and $2.55 per share to a new range of between $2.55 and $2.60.
As I discussed in my earnings preview, last quarter's disappointing earnings report caused more volatility in Intuit's stock than had been seen in more than 15 years. The implications of a dramatic sell-off in the space of a few trading days wasn't lost on management. We can infer from the way Intuit barreled into its stock repurchase that the executive team found the company's stock to be a sudden relative bargain:
Indeed, Intuit was able to obtain its stock at an average share price of $88.50. That's a discount of about 17% against where the INTU ticker ended on Friday.
Taking early stock of an important yardstickLet's check in on operating margin, another significant barometer for this quarter. Bear in mind that in the two fiscal quarters leading up to tax season, which begins in earnest in March, Intuit typically posts a loss.During the first quarter, Intuit incurred an operating margin of negative 4%, as opposed to a negative margin of nearly 18% in the comparable quarter last year.
As with revenue, this improvement is partly due to Intuit's recognition of some of its small-business software revenue on a ratable basis. But the company is also clearly benefiting from the growing number of monthly QBO subscriptions on its books.
The small size of this quarter's operating deficit is an early sign that the company may resume its usual 30% annual operating margin this year, on which its quite profitable business model depends. Because of last year's accounting change and an impairment charge, Intuit achieved a positive operating margin of just 17.6% in 2015.
It's early yet, but prospects already look brighter. The company now forecasts a 17%-20% revenue increase for Q2 2016, as well as an operating profit of between $15 million and $25 million for next quarter.
Again, a second-quarter operating profit would be atypical for this time of year -- last year Intuit recorded an operating loss of $89 million in quarter two. The confident Q2 forecast undoubtedly piqued investors' buying interest following the earnings report this week, among the other aforementioned factors. Judging from the company's stock chart, it seems likely that some shareholders were wondering why they parted with Intuit shares during August.
The article Intuit's Growth Story Remains Intact originally appeared on Fool.com.
Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.
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