Intuit Deducting From Its Margins / The software firm is aggressively shifting its QuickBooks business model to the cloud.

David Togut  & Rayna Kumar for Barron's write: At its annual investor meeting Tuesday, Intuit (ticker: INTU ) management made a surprising admission: for fiscal 2014, the five-year revenue value of a new QuickBooks Desktop user, $1,400, now equals that of a new QuickBooks Online (QBO) customer, undermining a key reason for the aggressive shift to QBO. Intuit management reduced the five-year revenue value of a new QBO customer from $1,500 to $1,400 and increased the five-year revenue value of a new QB Desktop customer from $1,000 to $1,400.

Given much higher earnings before interest and taxes (Ebit) margin on a new QB Desktop versus a QB Online customer, this means Intuit will aggressively shift its business model toward the cloud despite the reduction in its lifetime profit per QB customer, at least for the next two to three years. Of course, recurring subscription revenue will increase as a result. But, profits and cash flow might be less than if Intuit simply grew its QB Desktop franchise, which still offers superior functionality to QBO in inventory management, critical to Intuit's large base of manufacturing customers.

Intuit trades at the rich valuation of 17 times a possible 2017 earnings-per-share target of $5 provided by management despite a 2014-2017 estimated revenue and earnings road-map lacking in many details, including a fiscal 2016 outlook.

Higher long-term earnings are worth more than higher recurring revenue, all else being equal. Intuit's aggressive shift to QBO likely reduces profitability over the next three years despite management's promise of a more predictable revenue stream. Over time, QB Desktop's five-year revenue per new customer may surpass that of QBO since customers with the most complex software needs may remain on Desktop. We continue to believe that the value of any investment equals the present value of future cash flows.

Intuit will continue to reduce prices for QBO. Management signaled continued price cuts to drive QBO customer growth.

While Intuit does not disclose operating margin for either QBO or QB Desktop, we believe operating margin for QBO remains substantially lower than Intuit's Small Business Segment Ebit margin of 37%, while QB Desktop margin substantially exceeds that of the Small Business Server (SBS) segment.

Intuit's TurboTax and ProTax businesses generated an estimated 60%-70% of total fiscal 2014 Ebit, after the allocation of overhead, we believe. From January through April, all eyes turn to tax season.

Our price target remains $77, 10% below the current price, or 16 times our fiscal 2017 non-GAAP EPS estimate of $4.85, one multiple below Intuit's average next-12-months price/earnings multiple of 17 times since 2008.

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