Intuit well along on transition to cloud, on demand software

Intuit gets 60 percent of its revenue from "connected services"---cloud computing extensions to its core products---and plans on hitting the 75 percent market in 2015.

Intuit gets 60 percent of its revenue from "connected services"---cloud computing extensions to its core products---and plans on hitting the 75 percent market in 2015.

Brad Smith, CEO of Intuit, outlined the company's transition to online services last week on the company’s earnings conference call. It's a compelling story that's magnified as you peruse Intuit products, which range from QuickBooks Online to Mint to online services that manage physician offices.

Smith said:

We are growing Connected Services customers at a rapid pace. Because these customers link into our online solutions, over time we are able to more effectively cross-sell relevant products and services and maximize our revenue per customer.

One of our biggest opportunities longer-term in Small Business is increasing the number of offerings per customer. This is a key lever for revenue growth. We plan to move from about one and a half offerings per customer today to more than two offerings per customer over the next several years. And, as we have shared before, we already generate about 60% of our Company's revenue from Connected Services with the goal to increase this to 75% of the year 2015.

Looking ahead to the next chapter of Connected Services, mobile computing is quickly emerging whether it is smartphones or tablets. We have been actively establishing our leadership position in this next frontier as well.

While Smith's connected services talk was largely overshadowed by a quarter dominated by tax season. Intuit's fiscal third quarter historically is its largest. The company reported earnings of $730 million, or $2.20 a share, on revenue of $1.85 billion. Non-GAAP earnings were $2.33 a share. Wall Street was looking for earnings of $2.27 a share on revenue of $1.82 billion.

Related: Five questions with Intuit CTO Tayloe Stansbury

The real story in the quarter may be Intuit's ability to change its business model and become a cloud company. For instance, QuickBooks Online sales were up 42 percent and QuickBooks Enterprise was up 26 percent. Merchant payments---Intuit has its own payments service---was up 12 percent.

"Ultimately we are seeing the shift. You can see it happening in all the businesses. In TurboTax the majority of tax filings now coming in through the Web. You can see the same thing happen now in QuickBooks with a shift to online into mobile payments," said Smith.

In a nutshell, new customers to Intuit arrive via online services. And those customers can be more lucrative to Intuit.

Smith said:

What we are finding with QuickBooks Online is the majority of those customers are new to the franchise, and they are new to the accounting software category. They actually aren't customers from desktop moving over to online. And, by the way, that is still a favorable trend for us. If you think about the average QuickBooks desktop customer, that will come in at a price point of around $200, and they upgrade every three years. So over a five-year period, call it roughly $500 to $600.

Someone who comes in on QuickBooks Online pays an average of $24.95 a month, and over the same five-year period, because they are excited about having online backup in the cloud, anytime anywhere access and the ability to use mobile devices, that same customer is usually worth about $1500.

So that shift for us is not only the way customers prefer to do business now more online, but it also helps us from a lifetime value perspective, and it is easier to sell additional services online through hyperlinks than it is to make a phone call to a desktop customer and interrupt their day. So we have the ability to sell additional services easier as well.

Those comments are instructive to other traditional software vendors. Sure, the cloud transition can be tricky, but it can be done well.